A firm's short- run cost curves, as conventionally drawn, show that
A) ATC decreases and then increases as output increases.
B) ATC = TFC + TVC
C) the MC curve intersects the AVC and ATC curves at their maximum points.
D) AVC decreases as long as MC AVC.
E) AFC increases as output increases.

Question

A firm's short- run cost curves, as conventionally drawn, show that
A) ATC decreases and then increases as output increases.
B) ATC = TFC + TVC
C) the MC curve intersects the AVC and ATC curves at their maximum points.
D) AVC decreases as long as MC > AVC.
E) AFC increases as output increases.

Quizplus · Accepted Answer

The conventionally drawn short-run cost curves show that ATC decreases at first as output increases, reaches a minimum point, and then increases as output surpasses a certain level. This U-shaped curve is due to the spreading of fixed costs over a larger number of units of output at first, leading to a decrease in ATC, followed by diminishing marginal returns to variable inputs, causing marginal costs to increase, and raising the average variable cost, and eventually the average total cost. Option B is true, but it is not specific to the shape of the cost curves. Option C is incorrect because the MC curve intersects the AVC and ATC curves at their minimum points, not maximum points. Option D is true, but it only relates to AVC, not all short-run cost curves. Option E is false, as AFC decreases as output increases due to the fixed costs being spread over a larger number of units of output.

A Firm's Short- Run Cost Curves, as Conventionally Drawn, Show