Problem 1. If MC is increasing, what is happening to the ATC? Why is this happening?
a) What does the law of diminishing returns have to do with the shape of the AVC and ATC curves? Explain why those curves are U-shaped.
b) Why does the ATC curve always lie above the AVC curve? Why does the two curves move closer together, but never seem to meet each other?
c) Why is the AFC always declining? How can that be? Why doesn't the TFC ever decline?
Problem 2 Consider the following. Assume the fixed cost is $50. Calculate all the missing cells - show all work.
| Q |
TFC |
TVC |
TC |
AFC |
AVC |
ATC |
MC |
| 2 |
|
|
125 |
|
|
|
60 |
| 3 |
|
90 |
|
|
|
|
|
| 4 |
|
|
|
|
400 |
|
|