Why short-run cost curves take their shape

Overview

Recall questions on falling average fixed cost, diminishing returns, and the relationship between marginal and average cost.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   Explain why average fixed cost falls continuously as output increases.

   Model answer

   Because a fixed sum is spread over more units of output, so the cost per unit decreases.

2. 2

   What happens to average fixed cost as a firm expands production from 10 to 1000 units?

   Model answer

   AFC falls continuously because the same total fixed cost is divided by an increasingly larger number of units.

3. 3

   Why does marginal cost eventually rise after a certain level of output?

   Model answer

   Due to diminishing marginal productivity—each additional worker adds less to output, so the cost of producing each extra unit rises.

4. 4

   What happens to marginal cost when marginal productivity is rising?

   Model answer

   Marginal cost is falling.

5. 5

   What happens to marginal cost when marginal productivity is falling?

   Model answer

   Marginal cost is rising.

6. 6

   At which points does the short-run marginal cost curve intersect the average variable cost and average total cost curves?

   Model answer

   At their minimum points.

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