Question

Short Run Cost

1)Why is the ATC U-Shaped?

b)Why is marginal curve upward sloping in the short run ?

c)Where and why does the MC curve cross the ATC curve?

d)Given values for ATC and AVC,how would you determine Fixed cost (what are the steps necessary to get from the first twoto the last one )?

e)Given ATC,how would you determine total cost?

f)Graphically show and verbaly explain what the general pattern of and relationship between fixed cost,variable cost and total cost as output increase?

g)Graphically show and verbally explain what the general pattern of and relationship between average total cost,average variable cost and marginal cost as output increases?

Answer 1

1) Short run ATC curve is U shaped. It means that at first, this curve tends to fall and after reaching the minimum point, it begins to rise. It finds its explanantion in the law of variable proportions.

AVC assumes U shape. AC = AVC + AFC. AFC only falls as output increases and its component tends to gradually shrink with increase in output. Initially falling AFC combines with falling AVC to cause falling AC. AFC tends to be very very small so that, while it is falling, it longer obstructs the pace of rising AC to any meaningful extent. Hence, the final conclusion is that AC tends to be U-shaped in accordance with the law of variable proportions.