Question

T/F - The area under the marginal cost curve measures total variable costs.

Why is the short run average cost curve tangent to the long run average cost curve at a level of output?

Why does the supply curve of a firm must be in the positively sloped part of the MC curve and not in the negatively sloped part?

In the long run, why is the long run industry supply curve flat at min(AC)?

Answer 1

True. This is because MC measures all the additions made to total variable cost as fixed cost does not change

Long run average cost curve is constructed by joining all the minimum efficient scales of short run average cost curves. Hence short run average cost curve is always tangent to the long run average cost curve at the minimum of short run average cost

This is because in the negatively side, AVC is falling and any price that is not able to cover the AVC will not result in firm covering the variable cost. It is the minimum of AVC that becomes the shut down point and firm's supply function begins from this point.

This is because in the long run firm achieves minimum efficient scale when all the inputs are variable. Since all the firms reach their minimum efficient scale and start producing the same level of output at this fixed price = minimum AC, supply curve becomes flat.