Question

1. GLS Chapter 7, Question 13: True or false: Average variable cost reaches its minimum point at a lower level of output than average total costs. Explain your answer, using a graph of average and marginal costs to illustrate.

Answer 1

Answer.) 13. True. Marginal cost will intersect Average variable cost and Average total cost both of these curves at their minimum points.

The ATC curve, as illustrated in above figure, is U-shaped because the AVC cost curve is U-shaped. This is accounted for by the Law of Variable Propor­tions. It first declines, reaches a minimum (at Q3 units of output) and subsequently rises. The min­imum point on ATC is reached at a larger output than at which AVC attains its minimum.

We know that the vertical distance be­tween average total cost and average variable cost measures average fixed cost and average fixed cost continuously falls over the whole range of output. Thus, ATC declines at first because both AFC and AVC are falling. Even when AVC begins to rise after Q2, the decrease in AFC continues to drive down ATC as output in­creases. However, an output of Q3 is finally reached, at which the increase in AVC overcomes the decrease in AFC, and ATC starts rising.