Question

Demonstrate that the marginal production cost is equal to the average production cost for the value of the output that minimizes the average production cost.

Answer 1

Average cost is referred to the cost per unit of output.

AC= Total cost/ Quantity of output level (Q)

The average cost curve in the short run period is U shaped

With an increase in production, the AFC continuously decreases. At initial level, it decreases rapidly and then gradually slows down. AFC drops continuously but can never become zero because even if the production is nil, the ATC ( average total cost) decreases at initial level but after sometimes it start increasing. The Marginal cost is an addition made to the total cost for producing one more unit of output. At initial level when a firm increases its output, the total cost and variable cost start increasing at a diminishing rate, because at initial level of production, the laws of increasing returns apply. At initial level, moreover, the firm enjoys many economies that cause MC to fall down. As the output continues marginal cost becomes minimum and then ultimately starts rising due to the operation of Law of Diminishing Returns. Thus initially MC falls and after reaching the minimum point starts rising. It is how the MC curve becomes U shaped.