Question

Question 2

Draw the marginal cost (MC), average variable cost (AVC) and average total cost (ATC) curves for a typical firm in a diagram, and briefly explain the relationship between:

a. AVC and ATC.

b. MC and ATC.

Answer 1

Output	Fixed Cost	Variable Cost	Total Cost	Marginal Cost	Average Fixed Cost	Average Variable Cost	Average Total Cost
0	12	0	12	--	--	--	--
1	12	6	18	6	12	6	18
2	12	10	22	4	6	5	11
3	12	15	27	5	4	5	9
4	12	24	36	9	3	6	9
5	12	35	47	11	2.4	7	9.4

Total Cost = Fixed Cost + Variable Cost

Marginal Cost = Change in Total Cost / Change in output

Average Fixed Cost = Fixed Cost / output

Average Variable Cost = Variable Cost / output

Average Total Cost = Total Cost / output

Relationship between MC and ATC

1. When MC is below ATC, ATC continuously falls
2. At 4 units ATC and MC both are equal hence both curves intersect each other
3. When MC is above ATC

Relationship between ATC and AVC

1. The vertical distance between AC and AVC represents AFC
2. Both ATC and AVC curves are U-shaped due to the Law of Variable Proportion.
3. ATC and AVC can never intersect each other because the gap represents AFC which can never become zero
4. The minimum of ATC will always lie to the right of the minimum of AVC curve