1. Explain why the marginal cost curve intersects the AVC and ATC at their minim
ID: 1181379 • Letter: 1
Question
1. Explain why the marginal cost curve intersects the AVC and ATC at their minimums.
2. Because of the increase in world demand for grains, Midwest farmers are now earning economic profits. Some state governments are proposing an additional grain tax to fund education and public safety. Explain what effect this tax would have on market adjustment.
3. If a firm in a perfectly competitive market is losing money, why does it not just raise it price?
4. A perfectly competitive firm does not continually raise its output even though it can sell all it wants at the going price. Why not?
5. Most plumbers in a large city charge the same price for a one hour job at a residence. A consumer advocates says this is evidence of price collusion. Provide another explanation based on the theory of perfect competition.
6. What is the difference between the short run and long run? Give an example.
Explanation / Answer
1 Since MC affects both ATC and AVC, the answer is pretty much the same for why it intersects each one at its minimum. So what is it?
Well, the easiest way to explain might be to look at what happens if MC intersects AVC at some point that's NOT the minimum. If MC intersects AVC before the minimum happens (when AVC is still going down), that means that for the unit of quantity after the intersection, MC will be higher than AVC AND AVC will be going down.
That is contradictory. If for example you were looking at a series of twenty numbers, and the average of all those numbers was 100, adding the number 200 should make the average go up. In exactly the same way, if MC is higher than AVC, that means that the next unit is costing more to produce than the previous average, so the average should be going up. But in the scenario where MC intersects AVC before AVC's minimum point, you'll have a part on the graph where you're adding higher costs than the average but the average is going down, and that's impossible.
Similarly, if MC intersects AVC after its minimum (when AVC is going up), there will be points before the intersection where MC is below AVC, but AVC is increasing. Normally if you have a series 20 numbers whose average is 100, then you add the number 50, to that series, the average would go down. But if you have a situation where MC intersects AVC past AVC's minimum, it's like saying adding the number 50 to that sequence of twenty numbers would make the average of all the numbers go up, and that's another contradiction.
From this you can get that the only place MC can intersect AVC is at AVC's minimum. The argument is pretty much exactly the same for ATC. It would be easier to see if I could draw you the graphs, but you can try drawing them yourself and seeing what I described.
6
In economics, average cost or unit cost is equal to total cost divided by the number of goods produced (the output quantity, Q). It is also equal to the sum of average variable costs (total variable costs divided by Q) plus average fixed costs (total fixed costs divided by Q).
Some production decisions are fixed in the short run.The same decisions could be variable in the long run.
Refer to Figure 6 to see the relationship between short run and long run costs. The long run ATC curve is flatter than the short run ATC curve, and all short run ATC curves will be on or above the long run ATC curve.
In economics, average cost or unit cost is equal to total cost divided by the number of goods produced (the output quantity, Q). It is also equal to the sum of average variable costs (total variable costs divided by Q) plus average fixed costs (total fixed costs divided by Q). Average costs may be dependent on the time period considered (increasing production may be expensive or impossible in the short term, for example). Average costs affect the supply curve and are a fundamental component of supply and demand.
Because long run and short run costs are different, fixed and variable costs can change dramatically depending on the time horizon. In the long run, most costs are variable costs. For example, John Deer's cost of tractor factories is fixed in the short run because the number of tractor factories cannot be adjusted. However, in the long run, John Deer can build additional factories.
This shift in the cost curves, depending on the time horizon, causes the Average Total Cost (ATC) curve to also change depending on the time horizon. This occurs because in the long run, there are fewer fixed costs to divide among the quantity produced to calculate the average total fixed costs. This causes the ATC curve to fall more slowly in the long run than it falls in the short run. This also leads to different efficiency levels depending on the time horizon.
The Figure shows several different ATC curves at several different time horizons. Note that the U-shape changes over time. In the long run, the ATC curve is flatter than in the short run. Also note that as the time horizon increases, the efficiency level decreases and then increases again, creating a U-shape for efficiency levels.
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