Question

Prod. Costs & Perfect Comp

If the marginal cost is falling, what must be true about average variable cost and average total cost?

Describe why the long-run supply curve in an industry may be upward sloping? Give an example of such industry.

Answer 1

If the marginal cost is falling which is true for the initial level of output before there are diminishing marginal productivity, then average variable cost and average total cost lies above marginal cost and are also falling while after intersecting marginal cost; both average variable cost and average total cost are increasing and lies above marginal cost.

The reasons for an upward sloping long-run supply curve which is long-run average total cost curve are; first, there are certain constraint products like land. Increase in the number of farmers does not increase land available for production hence farmer's cost of production would rise. An increase in demand does not result into increase in supply hence long-run cost curve is upward sloping.