Question

In class we looked at (short run) cost curves.

Explain why the marginal cost curve intersects the average total and variable cost curves at their respective minimum values:

At what point on the ATC will a perfectly competitive firm always produce in the long run:

The supply curve for a perfectly competitive firm is the same as one of the cost curves based on a specific criterion. State both the curve and the criterion:

Answer 1

1.Marginal costs are part of ATC. When MC falls, ATC also falls. When MC rises, ATC also rises. So after intersecting ATC at the minimum point, both MC and ATC start to rise. This relationship is also true for AVC. When MC falls, AVC falls and after intersecting AVC at the minimum point, both AVC and MC rise.

2. In the long run, perfect competition firms will earn zero economic profit as P= ATC. Price will be equal to minimum ATC.

3. The supply curve will be the same as MC above AVC or the shutdown point.