3. (15 points) The following graph shows the cost curves for a typical firm. 8 2

Question

3. (15 points) The following graph shows the cost curves for a typical firm. 8 20 12 20 40 60 80 Quantity (units per day) a. Identify the following curves (A, B, C): i Marginal Cost ii Average Cost iii. Average Variable cost b. Average Variable Cost is minimized when output is equal to about units. c. The efficient scale of production is about units. d. Total Fixed Cost is $ e. If the market price is 16, a competitive firm would produce about dollars units and would carn a profitloss of about f. The firm would choose to shut down if price fell below

Explanation / Answer

Answer
a)
MC is the curve which cuts average variable cost and average total cost at its minimum and the average total cost is above average variable cost curve
ATC=AVC-AFC
so
MC=A
ATC=B
AVC=C
b)
The average variable cost is minimum at MC=AVC
it is at Q=30 units
c)
The efficient scale of production is at minimum of average total cost, it is at MC=ATC
Q=40 units
d)
Total fixed cost=average fixed cost*Q
AFC=AC-AVC
=12-8...............finding at Q=40
=4
FC=4*40=160

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