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1. Graphically depict a solution to the firm’s cost minimization problem and state the conditions that...

1. Graphically depict a solution to the firm’s cost minimization problem and state the conditions that determine the solution.

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Answer #1

A firm minimizes costs when average cost (cost per unit of output) is the least.

To see this graphically, we see the behavior of the Average Cost (AC) curve and the Marginal Cost (MC) curve

Then 2 conditions are required for a firm to minimize average cost:

The MC curve must intersect the AC curve; and it must do so from below. See the graph to see what the solution should look like graphically.

Q* is that quantity that minimizes average cost and AC* is the least cost per output attainable. Again, remember. The MC curve must intersect the AC curve from below (as it does in the figure) for AC to me minimized

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