In: Economics
As a business owner, you are faced with a number of "cost curves." Two of the most important are the marginal cost curve and the average total cost curve. How does your marginal cost affect your average total cost, and how does your ATC differ in the short and long-run?
Question :
Answer : Average total cost s total cost per unit of output and Marginal cost is change in total cost for a change in output produced.
Average cost reaches its minimum where marginal cost curve cuts average cost curve from below.
AC exceeds MC till its minimum point because AC includes both marginal cost of last unit and higher marginal costs of units produced previously
The newly produced units have lower marginal cost which pulls AC downward till its minimum point and then marginal costs increases and pull the AC upward.
Question 2 :
Answer : Long run costs are always less than the short run costs except at cost minimization point where given capital input is required amount of capital for cost minimization.
We can also say that the long run ATC passes through the decreasing portion of first short run average cost curve, then minimum point of short run average cost curve and then increasing point of short run average cost curve.