Q3Managerial Economics & Financial Accounting
Question
Explain the relationship between ATC, AVC and MC with a suitable example.
Answer
The Marginal Cost curve dictates the movement of Average Total Cost and Average Variable Cost, intersecting both at their respective minimums.
1. The Average Total Cost (ATC) and Average Variable Cost (AVC) curves are both U-shaped. 2. The distance between ATC and AVC represents Average Fixed Cost (AFC), which constantly decreases as output increases, meaning the ATC and AVC curves get closer together but never touch. 3. The Marginal Cost (MC) curve is also U-shaped and drives the other two. - When , AVC is falling. When , AVC is rising. - The exact same applies to ATC. 4. Therefore, the MC curve mathematically must intersect both the AVC curve and the ATC curve exactly at their lowest (minimum) points, cutting them from below.