Question

Short run cost curves:

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

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

c. 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

a. MC is the cost incurred for producing an extra good, whereas the ATC and ATVC are the average cost and average variable cost incurred for producing a good. So MC is a part of TC and with the increase in MC and output, the ATC starts to decline reaches the minimum point, wherein MC intersects and both MC ATC starts to increase showing decline in profits

b. Because of increased competition in perfect competition firms would operate at minimum ATC on a small profit margin

c. MC curve will be the supply curve as the producer would incur cost equals to MC at each level of good. So, producer would supply goods looking at the MC and hence the price too gets set based on MC incurred.