Question

AaBbCeDdl AaBbCeai AalbCede Heading 1 Heading 3 3. What does the MC curve do with regard to Output? Why? What is the relationship between the MC curve and ATC, AVC curves? Would this be important information for the Producer? B. Short-Run Cost of Production Schedule - Product X (Perfect Competition) (A) Assume price $250; Calculate total profit loss using TR - TC method. (B) Calculate Output using the formula: Profit (Price - ATC) xQ Hint: construct a new table to find new output at the different levels of ATC values first table) and profit in table 2 when price is $250. (C) Calculate Output using the formula: Profit -- (Price -- ATC) xQ Hint: construct a new table to find new output at the different levels of ATC values (in first table) when price is $180. Also find new profitloss values first (D) Calculate Output using the formula: Profit (Price - ATC) XO Hint: construct a new table to find new output at the different levels of ATC values (in first table) when price is $140. Also, find new profit loss values first. (E) Use price schedule to determine O's. (Repeat the process for prices $350, S450, 5550, and 5650 before presenting all the output computed at different price levels in the table below. (F) What does short-run cost model tell you about the behavior of the firm in regard to MC and Price?

Answer 1

Q 3) Marginal cost is the change in total cost when an additional unit of output is produced.

Marginal cost curve is U-shaped indicating that marginal cost initially tends to decline with the increase in the level of output and eventually it tends to rise. Falling marginal cost corresponds to rising marginal product that is when there are increasing returns to scale. Rising marginal cost corresponds to falling marginal product that is when there are diminishing returns to a factor.

Following is the relationship between marginal cost and average total and average variable cost,

1. When average cost and average variable cost decline, marginal cost declines faster than average cost or average variable cost. So that marginal cost curve remains below the average cost and average variable cost curve.

2. When average cost and average variable cost increase, marginal cost increases faster than average cost or average variable cost. So that marginal cost curve is above the average cost and average variable cost curve.

3. Since marginal cost declines faster than average cost and average variable cost. it reaches its lowest point earlier than average cost and average variable cost. So, marginal cost starts rising even when average cost and average variable cost is falling.

4. Marginal cost must cut average cost and average variable cost from its lowest point.

The structure of the marginal cost tells the producer whether he is operating in the increasing or diminishing returns to scale portion and accordingly he can make decisions in order to minimize the cost and maximize his profits.