Final answer:
Marginal cost intersects with average cost at the lowest point of the U-shaped average cost curve. When the marginal is lower than the average cost, the average cost decreases; when the marginal is higher, the average cost increases. At the shutdown point, if the market price is below the minimum average variable cost, the firm should shut down.
Step-by-step explanation:
If marginal cost begins below average cost and is everywhere increasing, then the shape of the average cost curve would typically be U-shaped. This shape signifies average costs decreasing initially due to economies of scale and spreading of fixed costs over more units, and then increasing as diseconomies of scale set in.
The intersection of the marginal cost curve and the average variable cost curve at the shutdown point indicates that if the price the firm receives is below this point, it cannot cover its variable costs, and should shut down to minimize losses.
Furthermore, marginal cost intersects with average cost at the minimum point of the average cost curve. This is because when the marginal cost is below the average cost, producing one more unit reduces the overall average cost, leading to a downward-sloping average total cost curve in this zone. Conversely, when marginal cost is above average cost, the average cost increases with additional units produced.