Question

IMPORTANT: I know the answer is "C". However, I don't know why. Could you please explain why? Thank you

A linear total cost curve that passes through the origin implies that

a.         average cost is constant and marginal cost is variable.

b.         average cost is variable and marginal cost is constant.

            c.         average and marginal costs are constant and equal.

            d.         you need more information to answer question.

Answer 1

A linear total cost curve passing through the origin implies zero fixes costs. This is because Total Cost (TC) is the sum of Fixed Costs (FC) and Variable Costs (VC). Costs cannot be negative. So, the total cost curve can pass through origin only when FC=0.

If FC=0, we have

which means that for zero output produced, we have zero total cost. The total Cost rises with each additional unit of output produced. Let us now consider a linear Total Cost curve that passes through the origin (intercept term = 0). We thus define the linear function as:

We now define Average Cost as the Total Cost per unit of output, that is

Similarly, we define Marginal cost as the cost of producing an additional unit of output.

Also, we see that

Thus, we see that a linear Total Cost Curve that passes through the origin implies that

(c) Average and Marginal Costs are constant and equal.