Assume that a firm wants to maximise profits, using a diagram (with marginal cost, average total...

Assume that a firm wants to maximise profits, using a diagram (with marginal cost, average total cost and average variable cost curves), explain the decisions a firm will make to maximise profits in the short run and indicate the profit/loss on the diagram when the price is:

(a) Greater than the minimum average total cost.

(b) Less than the minimum average variable cost.

(c) Less than the minimum average total cost but greater than the average variable cost.

Expert Solution

The ATC curve is U shaped due to application of law of variable proportions in the short run and law of returns to scale in the long run. The ATC and AVC are both U shaped. The marginal cost or MC curves cut the two curves, i.e. ATC and AVC at its minimum. The equilibrium is determined by the intersection of Price and marginal cost curve.

Rahul Sunny answered 2 years ago

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