Question

(a) Explain the marginal cost and average cost. Elaborate on the relationship between the two. [8...

(a) Explain the marginal cost and average cost. Elaborate on the relationship between the two. [8 marks]

(b) Elaborate on the main differences between short run and long run. [4 marks]

(c) Differentiate between economies of scale and economies of scope. [8 marks]

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Answer #1

(a)

The marginal cost is the additional cost incurred on producing one additional output. That is the cost involved when the firm produces one mopre product. The average cost on the other hand is the per unit cost of the product. The formulas for the two costs are

MC(Marginal Cost)= Change in TC/Change in Output(Q)

ATC (Average Total Cost)= Total Cost(TC)/Output(Q)

Relationship

When ATC is falling MC is less than AC

When ATC is at its minimum, MC equals ATC(MC=ATC)

When ATC rises, MC rises faster than ATC.

Both curves are U-shaped because of operations of law of returns to scale in the long run and law of variable proportions in the short run.

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