Q. Explain why MC cuts AC and AVC at their minimum values?
Ans: Marginal cost (MC) is the extra total cost resulting from 1 extra unit of output. Average total cost resultiong is the sum of ever decling average fixed cost (AFC) and average variable cost (AVC). Average total cost stands for (AC). In the short run the costs are generally represented by a U- shaped curve that is always intersected at its minimum point by the rising MC curve. Average variable cost (AVC) equals variable cost divided by output, or AVC: VC/q. It is important to understand the link between average cost and marginal cost. The three rules: 1. When marginal cost is below average cost, it is pulling average cost down. 2. When MC is above AC, AC is been pulled by MC curve.
3. When MC just equals AC, AC is constant. AT the bottom of a U-shaped AC, MC=AC=minimum AC. The U-shaped cost curves form the foundation for the analysis of short-run, profit-maximizing production by a firm. These three curves can provide all of the information needed about the cost side of a firm's operation. The diagram at the bottom displays the three U-shaped cost curves--average total cost curve (ATC), average variable cost curve (AVC), and marginal cost curve (MC)--for the production of Wacky Willy Stuffed Amigos (those cute and cuddly snakes, armadillos, and turtles). All three curves presented in this diagram are U-shaped. In particular, the production of Wacky Willy Stuffed Amigos, like other goods, is guided by increasing marginal returns for relatively small output quantities, then decreasing marginal returns for larger quantities.
Consider a few reference points:
* The marginal cost curve reaches its minimum value at 4 Stuffed Amigos. * The average variable cost curve reaches its minimum at 6 Stuffed Amigo * The average total cost curve reaches its minimum at 6.5 Stuffed Amigos.
the minimum values of the average total cost curve and the average variable cost curve occur at different...
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