Answer to Question #121514 in Microeconomics for Hamza

Question

Explain how the value of marginal cost affects the values of average variable cost and average total cost and what this means for the relationship between the marginal cost curve and the average variable and total cost curves.

Answer 1

We know that both the average total cost and average variable cost decreases at first with an increase in output, they reach their minimum and then they begin to rise as the output increases.

The relationship between both the average total cost, the average variable cost and the marginal cost curve is that the marginal cost curve cuts both curves at their minimum.

Thus, as the marginal cost decreases, the variable cost decreases and thus, the average total cost decreases and vice versa.

When the average cost is decreasing, the firm is enjoying economies of scale and when it is decreasing, the firm is suffering dis-economies of scale.