Question

ourses / ECON 1150 R13 SUMMER 2020 / 27 July - 2 August / Term Test # 4 (Wednesday July 29th, 2020 at 11:00 - 13:00) 1150: Principles of Microeconomics (R13) 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? re to search

Answer 1

1.

It shall be noted that the ATC curve is UZ-shaped because Average Costs are high at low levels of output because both the Average Fixed Costs and Average Variable Costs are more. But, as the level of output increases, the Average Costs fall more sharply due to the combined effect of the declining average fixed and Average Variable Costs. This results from the use of indivisible factors and the reaping of internal economies of labor, technical, managerial, marketing. The Average Cost will continue to fall till they reach the minimum point which is the optimum point level of output. Once the optimum level of output is reached, Average Costs start rising as more are produced beyond this level. The rise in Average Variable Costs is more than offset by the small fall in Average Fixed Costs and hence the Average Costs rises quickly. This is due to the change of economies into dis-economies.

2.

When the average-total-cost curve is falling, the marginal-cost curve lies below the average-total curve.

Cost MC АС S O Output

When the average-total-cost curve is rising, the marginal cost lies above the average-total-cost-curve

3.

According to the mathematical law that governs the relationship between average total cost and the marginal cost, the two curves intersect at the minimum of the average total cost curve.