True and False 1) Average total cost and average variable cost are minimized at the same...

True and False

1) Average total cost and average variable cost are minimized at the same level of output.

2) When marginal cost is between average variable cost and average total cost, marginal cost is increasing.

3) Average total cost of producing 100 units of output is $5. If the marginal cost of producing the 101st unit is $4, then average total cost of 101 units is less than $5.

4) Average variable costs fall continuously as quantity of output rises.

Solutions

Expert Solution

Ans 1: False. Note that, Avergage total cost = Average fixed cost + Average Variable cost. So, the average variable cost is minimzed at lower level of output as compared to the minimization of average total cost. The difference between these cost is average fixed cost.

Ans 2: True, When MC is between AVC and ATC, it continously rises due to decreasing returns of factor (law of variable proportion).

Ans 3: ATC of 100 units = $5 , therefore, TC = ATC*Q = $5*100 = $500

MC of 101st unit = $4 , the TC of 101 unit = $500 + 4 = $504

ATC of 101st unit = TC of 101st unit / 101 = $504/101 = 4.9 . True, less than 5 (approximately)

Ans 4: False, AVC first falls, then reaches minimum and then increases continously as output rises. The AVC curve is U-shaped curve.

The AVC falls as output rises due to increasing returns to factor (law of variable proportion)

AVC reaches minimum point as output expands further (constant returns to factor in law of variable proportion).

Finally, AVC starts rising as output increases. (Diminishing returns to factor of law of variable proportion).

Rahul Sunny answered 2 years ago

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