Question

Complete the following table and graph AVC, ATC, and MC. The best way to submit this assignment is by cutting and pasting the2. What is the shape of the MC curve? Why does it have this shape? How do you know this? 3. What do you know about the values

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Answer #1

Output

FC

VC

TC

AFC

AVC

ATC

MC

0

10

10

-

-

-

1

10

10

20

10

10

20

-

2

10

18

28

5

9

14

18

3

10

23

33

3.33

7.66

11

5

4

10

33

43

2.5

8.25

10.75

10

5

10

48

58

2

9.4

11.6

15

6

10

68

78

1.66

11.33

13

20

7

10

98

108

1.42

14

15.42

30

8

10

148

158

1.25

18.5

19.75

50

1) The AVC curve is U-shaped with its minimum point at 7.66 and the ATC curve is also U-shaped with its minimum point at 10.75. The reason behind this shape is the because of the inverse U-shape of the APL curve. Now, the APL curve is of the inverse U-shape because of the Law of Diminishing Returns.

2) The MC curve is also U-shaped with its minimum point at 5. The reason behind this is again the Law of Diminishing Returns.

3) We know, MC crosses ATC and AVC at their minimum points, i.e. at ATC = 10.75 and AVC = 7.66.

4) ATC is higher than AVC because:

                        The minimum point of ATC > The minimum point of AVC

5) Costs are in the short run as firms are incurring a constant fixed cost of 10.

6) If the Company is operating in a perfectly competitive industry, it will earn zero/normal profits and produce the output where P = MC, i.e., 6 units. Now, if it raises the price, consumers will shift to other companies and it will incur losses.

7) For P = 30, equilibrium quantity = 7 units

8) Zero Profits and 4 units.

9) Characteristics of a Perfectly Competitive Industry:

  • Large number of buyers and sellers,
  • Price-taking behaviour,
  • Product Homogeneity,
  • Profit Maximisation Objective,
  • Free Entry and Exit

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