Multiple Choice
Which of the following statements about cost curves in the context of cost-minimizing combinations of labor and capital is correct?
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10. The Costs of Production
Cost-Minimizing Combination of Labor and Capital
Multiple Choice
Which of the following graphs correctly represents the relationship among the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves in the short run?
A
The ATC curve lies below the AVC curve at all output levels.
B
The MC curve is always below both the AVC and ATC curves.
C
The AVC curve intersects the MC curve at the minimum point of the ATC curve.
D
The MC curve intersects both the AVC and ATC curves at their minimum points.
Verified step by step guidance1
Step 1: Understand the definitions of the curves involved: Marginal Cost (MC) is the additional cost of producing one more unit of output; Average Total Cost (ATC) is the total cost per unit of output; Average Variable Cost (AVC) is the variable cost per unit of output.
Step 2: Recall the typical shapes and relationships of these curves in the short run: MC curve is typically U-shaped due to initially decreasing and then increasing marginal returns; AVC is also U-shaped and lies below ATC because ATC includes both AVC and average fixed cost (AFC).
Step 3: Analyze the relationship between MC and AVC: The MC curve intersects the AVC curve at the AVC's minimum point. This is because when MC is less than AVC, AVC is decreasing, and when MC is greater than AVC, AVC is increasing.
Step 4: Analyze the relationship between MC and ATC: Similarly, the MC curve intersects the ATC curve at the ATC's minimum point. This is due to the same logic as with AVC, but ATC includes fixed costs as well.
Step 5: Use these relationships to evaluate the given statements: The correct graphical representation must show the MC curve intersecting both AVC and ATC curves at their respective minimum points, with ATC always above AVC, and MC crossing them from below at these points.
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