Question

Consider the total cost function TC= 120y-y^2+0.02y^2.

a. What level of y yields minimum cost per unit of y?

b. What is the relationship between MC and AVc at the above level of output?

Answer 1

a.

$TC= 120y-y^2+0.02y^2\\ 0=120-2y+0.04y\\ 0=120-1.96y\\ y=61.22$

b.

The decreasing average variable cost (AVC) responds to growing factor returns, whereas the rising marginal cost (MC) responds to rising marginal product. As a result, the rising MC and dropping AVC indicate that the MC will be lower than the AVC.