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. Draw & explain it in detail.

Answer 1

Both average total cost and average variable cost initially reduces with an increase in output. After they have reached their lowest or minimum, they start to rise again as the output increases.

The relationship between average total cost and average variable cost is that the marginal cost curve cuts both curves at their minimum prices or fees. As the marginal cost decreases, the variable cost decreases. Therefore the average total cost decreases and vice versa.

When average cost increases, the company enjoys economies of scale, and when it decreases, the firm suffers dis-economies of size