Question

a)Why is the ATC U-Shaped?

b)Why is marginal curve upward sloping in the short run ?

c)Where and why does the MC curve cross the ATC curve?

d)Given values for ATC and AVC,how would you determine Fixed cost (what are the steps necessary to get from the first twoto the last one )?

e)Given ATC,how would you determine total cost?

f)Graphically show and verbaly explain what the general pattern of and relationship between fixed cost,variable cost and total cost as output increase?

g)Graphically show and verbally explain what the general pattern of and relationship between average total cost,average variable cost and marginal cost as output increases?

Answer 1

The ATC is U shaped becaue of application of law of returns to a factor in the short run and law of returns to scale in the long run. As more and more inputs are employed along with the fixed factors in the short run the output first increases at increasing rate then at a decreasing rate and finally falls. Similaryly when more and more of all inputs are employed in the long run the output first increases at increasing rate then at a constant rate and finally falls. When the output is increasing at increasing rate the average costs are falling and when the output is falling the ATC will start to go up.

Marginal Cost is upward sloping in the short run because of the diminishing returns. When the output is falling in the short run when more and more units of variable factors are employed, the marginal costs starts to go up. The marginal cost of variable input declines when the production is going up. Also the marginal costs starts to go up when there are diminishing returns and fixed factors are not fully utilised.

The MC curve intersects the ATC and AVC curve from below and at their minimum.

We have the following relation between ATC, AFC and AVC

ATC = AFC+AVC

AFC = ATC-AVC

Also AFC = FC/Q, so

FC/Q = ATC-AVC

so we can conclude

FC = (ATC-AVC)*Q