Question

2. How does marginal productivity translate to marginal cost and represent the firm's supply curve? Explain why the marginal cost curve intersects the average cost curve at the minimum point of the u-shaped average cost curve.

please as soon as possible

Answer 1

2.

Ans:

a.

This can be explained using law of variable proportions.

Important factor: Law of diminishing returns.

When diminishing returns exist, Marginal product falls with more input use. This implies that to keep increasing output, we need to incur higher marginal costs (less MP implies sacrifice) to bring MP to previous levels and to avoid it from falling.

b.

Marginal cost is the cost of the last unit produced. If the marginal cost is lower than the average cost, it pulls the average down. If the marginal cost is higher than the average cost, it pulls the average up. So when the marginal cost curve intersects the average cost curve, it goes from being below the average to above the average. This can be explained by the fact that when the cost of the marginal output is equal to the average cost of the output, then the AC neither falls nor rises (i.e. it reaches its minimum).

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