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Draw the average variable cost and average total cost curves for a typical firm. Include the...

Draw the average variable cost and average total cost curves for a typical firm. Include the MC curve. Describe the relationship between marginal and average costs.

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Answer #1

On the other hand, some costs increases with the increase in the output or services, these costs is known as the variable cost.

Total cost is the sum of total variable cost and total fixed cost.

TC= fixed cost + Variable cost

Average variable cost is the average of the total variable cost and it is calculated with the following formula.

AVC= VC/Q

Marginal cost is the addition of the total cost due to producing an extra unit of output. This is calculated with the following formula.

MC= VCn- VCn-1

Average total cost is the average of the total cost and it is calculated with the following formula.

ATC=TC/Q

As it can be seen in the diagram that when MC is below ATC, then ATC is decreasing and after that MC cuts from below ATC at its minimum level.

After that when MC is above the ATC, the ATC starts increasing.

Similarly MC cuts AVC its minimum level.

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