Question

3. Illustrate following statements by suitable diagrams/mathematics :

a. "Short run cost curves are mirror reflections of product curves."

b. "Short run average variable cost attains minimum before does the short run average cost."

c. "All plants are optimum plants under constant retums to scale."

d "Short run marginal curve passes through the minimum of both short run average variable cost curve as well as short run average cost curve."

Answer 1

(a) We know that SHort run cost curves look like following:

Further, product curves look as following:

Clearly, cost curves are mirror reflections of product curves.

(b) From the graph below, it can be observed that average variable cost attains minimum at Q₂, but average total cost attains minimum at Q₃. This is because Average total cost also contains a component of fixed cost, which needs to be cancelled by the revenue.

(c) According to the law of constant returns when a firm employs more and more factors, output increases at a constant rate. Therefore, the average cost curve as well as marginal cost curve remains parallel to horizontal axis. This can be made clear with the help of diagram below. In the diagram below, output has been measured on OX- axis while costs on OY-axis. Here, we see that AC = MC and both are parallel to X-axis.

(d) As can be seen from the figure, Short run marginal curve passes through the minimum of both short run average variable cost curve (Q₂) as well as short run average cost curve (Q₃).