Question

Draw a marginal cost and average cost curve for a typical firm. Explain what their shapes mean and why they intersect where they do.

Answer 1

The average cost curve and the marginal cost curve have a U-shaped pattern, with the intersection occurring at the minimum point of the average cost curve.

Step-by-step explanation:

Both the average cost curve and the marginal cost curve have a U-shaped pattern, with the average cost curve decreasing and then increasing, while the marginal cost curve typically increases. The reason for this is that in the early stages of production, as output increases, there are economies of scale, which lead to a reduction in average costs. However, at a certain point, the firm starts experiencing diminishing returns, causing the average costs to rise. The intersection of the marginal cost and average cost curves occurs at the minimum point of the average cost curve, indicating the level of production where the firm is operating at its most efficient point.