Question

3. Give short answers to the following questions, based on your understanding of the common shapes of cost curves:

a. Where will the marginal cost curve cross the average cost curve, and why?

b. Will the total cost curve tend to flatten out or to slope up more steeply on the right? Why?

c. Why are total costs and marginal costs not usually shown on the same graph together?

d. What are the underlying economic reasons that short-run average cost typically slope down and then up?

e. Will average variable costs usually be above or below average cost—or will it sometimes be one and sometimes the other? Explain.

Answer 1

Solution:-

a. The marginal cost curve cross the average cost curves at a point where the average cost curves are minimum. When average cost curve is falling the Marginal cost curve is rising, when average cost curve is minimum the marginal cost curve equals average cost curve and when average cost curve is rising the marginal cost curve rises faster or steeper than average cost curve.

This is so because average cost includes average variable cost and average fixed cost. Now when a firm decides to have a certain cost structure for its output production, the cost structure is pre-decided. Thus for a certain level of infrastructure and labour, the given investment will let him produce a certain maximum amount of quantity. Say, a machine which can produce 1000 units of outputs with 100 labour being employed on that machine is what the certain level of investment or cost taken care by the firm owner.

We know, Average Cost (AC) = Total Cost (TC) / Q

Now when the production starts , say , only 10 units of output is produced but on that respective excess capacity machine. Hence the average cost during start of production,say , with only 1 unit of output production, was higher compared to that of when 10 units were produced. Since when the total cost was previously, during the start of production, divided by 1 and later on got divided by 10, which reduced the average cost of the 10 unit production and this took a downward trend.

But during this very immediate time, marginal cost of production keeps rising, since marginal cost of production is based on every unit of output produced. For every additional extra unit of production the marginal cost increases and keeps on rising because the infrastructure and total cost is fixed. Thus the MC curve cuts the AC curve from below and at a point where AC is minimum.

b) Total cost curve will move up more steeply on the right as the curve is an increasing curve. With more and more units of product produced the total cost curve increases continuously.

c) The marginal cost curve is produced from the slope of the total cost curve itself. Hence whats the point of contrasting original curve with its own slope. Whereas the average and marginal curves are more comparable and are more conclusive or contrasting giving different viewpoints on the overall economic structure.

d) This answer is explained earlier, that why and when the Short Run average cost (SRAC) curves slopes down and then up.

This is so because average cost includes average variable cost and average fixed cost. Now when a firm decides to have a certain cost structure for its output production, the cost structure is pre-decided. Thus for a certain level of infrastructure and labour, the given investment will let him produce a certain maximum amount of quantity. Say, a machine which can produce 1000 units of outputs with 100 labour being employed on that machine is what the certain level of investment or cost beared by the firm owner.

We know, Average Cost (AC) = Total Cost (TC) / Q

Now when the production starts , say , only 10 units of output is produced but on that respective excess capacity machine. Hence the average cost during start of production,say , with only 1 unit of output production, was higher compared to that of when 10 units were produced. Since the total cost was previously, during the start of production, divided by 1 and later on got divided by 10, which reduced the average cost of the 10 unit production and this took a downward trend.

This fall in SRAC continues until the the complete fixed cost along with variable cost expenditure per unit of produce is exhausted. This means the final unit of produce where without changing any fixed cost or variable cost the maximum number of unit are produced on the previous setting. Now as production increases, the SRAC leaves the minimum level and starts increasing on the right. For additional production now a new labourers are introduced or put into the facility. This gradually increases the total cost, increasing the variable cost component. Some new machines and facilities are also implemented gradually or new additional machines to speed up the previous machine's production process is also introduced adding up the total cost. This leads to the rise of the SRAC curve.

Hence the Short Run average cost (SRAC) curves slopes down and then up.

Hope it helps you