Question

Complete the following table and graph AVC, ATC, and MC. The best way to submit this assignment is by cutting and pasting the table into an Excel spreadsheet or a Word Document for the calculations. If you do want or cannot use Excel or Word, you can complete the table and then submit a picture of the table. I want to see, whether you are able to complete the table correctly. Submit the completed table and answers to the questions that follow the table. The way to derive the costs are these basic formulas: Total Cost = Fixed cost + variable cost AVC = Total variable cost/output, ATC = Total cost/output, MC = change in the total cost/ change in output Output Fixed Cost Variable Cost Total Cost Average Average Average Marginal Fixed Variable Total Cost Cost Cost Cost 0.00 10.00 1.00 20.00 2.00 28.00 3.00 33.00 4.00 43.00 5.00 58.00 6.00 78.00 7.00 108.00 8.00 158.00 1. What is the shape of the AVC and ATC curves? What economic law accounts for this shape? How do you know this?

Answer 1

Output	FC	VC	TC	AFC	AVC	ATC	MC
0	10		10	-		-	-
1	10	10	20	10	10	20	-
2	10	18	28	5	9	14	18
3	10	23	33	3.33	7.66	11	5
4	10	33	43	2.5	8.25	10.75	10
5	10	48	58	2	9.4	11.6	15
6	10	68	78	1.66	11.33	13	20
7	10	98	108	1.42	14	15.42	30
8	10	148	158	1.25	18.5	19.75	50

1) The AVC curve is U-shaped with its minimum point at 7.66 and the ATC curve is also U-shaped with its minimum point at 10.75. The reason behind this shape is the because of the inverse U-shape of the APL curve. Now, the APL curve is of the inverse U-shape because of the Law of Diminishing Returns.

2) The MC curve is also U-shaped with its minimum point at 5. The reason behind this is again the Law of Diminishing Returns.

3) We know, MC crosses ATC and AVC at their minimum points, i.e. at ATC = 10.75 and AVC = 7.66.

4) ATC is higher than AVC because:

                        The minimum point of ATC > The minimum point of AVC

5) Costs are in the short run as firms are incurring a constant fixed cost of 10.

6) If the Company is operating in a perfectly competitive industry, it will earn zero/normal profits and produce the output where P = MC, i.e., 6 units. Now, if it raises the price, consumers will shift to other companies and it will incur losses.

7) For P = 30, equilibrium quantity = 7 units

8) Zero Profits and 4 units.

9) Characteristics of a Perfectly Competitive Industry:

• Large number of buyers and sellers,
• Price-taking behaviour,
• Product Homogeneity,
• Profit Maximisation Objective,
• Free Entry and Exit