Question

1. Bob Edwards owns a bagel shop. Bob hires an economist who assesses the shape of the bagel shop's average-total- cost (ATC) curve as a function of the number of bagels produced. The results indicate a U-shaped average-total-cost curve. Bob's economist explains that ATC is U-shaped for two reasons. The first is the existence of diminishing marginal product, which causes it to rise. What would be the second reason? Assume that the marginal-cost curve is linear (Hint: The second reason relates to average fixed cost.) 2. If the average-total-cost curve is falling, what is necessarily true of the marginal-cost curve? If the average-total-cost curve is rising, what is necessarily true of the marginal-cost curve? 3.According to the mathematical laws that govern the relationship between average total cost and marginal cost, where must these two curves intersect?
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Answer 1

Answer 1. Average total cost refers to the per unit total cost of production. It is also defined as the sum of average fixed cost and average variable cost. Like average variable cost, average total cost also initially falls with increase in output. Once the output rises till the optimum level average cost starts increasing.

Average total cost curve is a u shaped curve. It means initially it falls and after reaching its minimum point it is starts rising. There are two reasons for the u shaped curve of average total cost.

A. We know that average total cost is derived from average fixed cost and average variable cost. Average fixed cost falls with rise in output because constant total fixed cost is divided by increasing output. So when average fixed cost falls, average cost also falls and reaches its minimum point.

B. due to the operation of law of variable proportion average cost curve is u shaped curve. We know that as output increases , law of diminishing marginal product operates. After the point of optimum combination, economies turns into diseconomies and the result is increased in output and the average total cost.

Answer 2.

When average total cost is falling, marginal cost is below average total cost.

When average total cost curve is rising, then marginal cost curve is above average cost curve.

When average total cost is neither falling now rising then marginal cost is equal to average total cost.

Marginal cost curve cut the average cost curve at the minimum point of AC.

Answer 3.

The average cost curve and the marginal cost curves have been derived from the total cost curve respectively.

We know that, AC = TC/Q

MC =

Дтсде

marginal cost curve cuts the average total cost curve at the minimum point of average total cost curve.

the relationship between marginal cost and average cost can be proved mathematically as follows:

TC = AC X Q

MC =

Дтсде

MC = $\Delta ( AC x Q)/ \Delta Q$

Mc = AC x 1 + Q X $\Delta AC/ \Delta Q$

MC = AC + Q( SLOPE OF AC)

IF SLOPE OF AVERAGE TOTAL COST IS GREATER THAN ZERO, THEN MARGINAL COST IS GREATER THAN AVERAGE COST.

SLOPE OF AVERAGE TOTAL COST IS EQUAL TO ZERO THEN MARGINAL COST IS EQUAL TO AVERAGE TOTAL COST.

IF SLOPE OF AVERAGE TOTAL COST IS LESS THAN ZERO THEN MARGINAL COST IS LESS THAN AVERAGE TOTAL COST