Question

a. Explain why the marginal cost curve intersects the average total and variable cost curves at their

respective minimum values:

b. At what point on the ATC will a perfectly competitive firm always produce in the long run:

c. The supply curve for a perfectly competitive firm is the same as one of the cost curves based on a specific criterion, state both the curve and the criterion.

Answer 1

a. Explain why the marginal cost curve intersects the average total and variable cost curves at their respective minimum values:

MC curve is rising before and after the minimum of ATC and AVC. ATC and AVC are U-shaped which indicates that they will attain a minimum point. MC reflects the change in variable cost for 1 unit while ATC and AVC are distributed over a large range of output. Before Minimum ATC and AVC, MC is falling and so ATC and AVC are decreasing. After their miniumum, MC is rising so ATC and AVC are also rising. This indicates that at the minimum, MC must be equal to ATC and AVC and so it cuts them at their minimum.

b. At what point on the ATC will a perfectly competitive firm always produce in the long run:

Average total cost curve is generally U-shaped which implies that the output level to the left of the minimum efficient scale MES (lowest point on the average cost) exhibits increasing returns to scale. This implies that a perfectly competitive firm that operates at minimum efficient scale (minimum of ATC) earns zero economic profit

c. The supply curve for a perfectly competitive firm is the same as one of the cost curves based on a specific criterion. The cost curve is MC and the required condition is that it should be rising and it should begin from the level of output at which minimum of AVC is attained because that price is the shut down point below which a firm does not produces.