Why when there are economies of scale, the average and marginal cost functions will never intersect?

Expert Solution

It shall be noted that economies of scale situation arises when the average cost decreases as the level of output increases.

It shall further be noted that marginal cost is the incremental cost associated with the last unit produced.

Whereas, the average cost is the per unit cost.

The per unit cost will decrease when additional unit is produced at lower than average cost. That means, marginal cost is lower than average cost. This results in law of increasing returns to scale or law of diminishing costs.

It is due to the law of increasing returns to scale or the law of diminishing costs, the average cost and marginal cost slopes downward and that the downward slope of MC curve is more than that of AC curve such that marginal cost remain below the average cost.

It is due to the law of increasing returns to scale that contributes to economies of scale. Hence, when marginal cost remain below the average cost, marginal cost function will not intersect average cost function.

Rahul Sunny answered 1 year ago

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