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Question
Draw Average Variable Cost, Average Total Cost ad Marginal Cost curves in a single diagram.
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Solution
Average Variable Cost (AVC), Average Total Cost (ATC) and Marginal Cost (MC) curves:
Relationship between ATC (or AC) and MC:
- When ATC is falling, MC falls at a faster rate; and MC remains below ATC curve.
- When AC is rising, MC rises at a faster rate; and MC remains above ATC curve.
- When AC is at its minimum point, (z), MC is equal to ATC.
- MC curve cuts ATC curve at its minimum point.
- ATC and MC are both U-shaped curve reflecting the Law of Variable Proportions.
- While ATC includes both variable as well as fixed cost, whereas, MC includes only the variable cost.
- ATC (or AC) and MC are both derived from TC as:
i.e., `"AC" = ("TC")/("Q") and "MC" = (Delta "TC")/(Delta "Q")`
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