Average Cost and Marginal Cost Quiz

Cost Concepts

• Average Cost (AC) measures the total cost per unit of production.
• Marginal Cost (MC) is calculated by dividing the change in total cost by the change in quantity produced.
• Formula to calculate Marginal Cost (MC): MC = ΔTC / ΔQ, where ΔTC is the change in total cost and ΔQ is the change in quantity produced.

Relationship between AC and MC

• When marginal cost is less than the average cost, the average cost decreases.
• Conversely, when the marginal cost is greater than the average cost, the average cost increases.
• The relationship between AC and MC influences cost structures, as it helps firms determine the optimal level of production.

Long Run Average Cost (LRAC)

• The LRAC curve represents the minimum cost per unit of production in the long run, when all inputs are variable.
• The LRAC curve is typically U-shaped, indicating that there are economies of scale at low levels of production and diseconomies of scale at high levels.

Market Structures

• In perfect competition, there are many firms producing a homogeneous product, and no single firm has market power.
• A key characteristic of perfect competition is the absence of barriers to entry and exit.
• A monopoly is differentiated from perfect competition by the presence of a single firm producing a product, giving it market power.
• In monopolistic competition, there are many firms producing differentiated products, and firms have some degree of market power.
• Oligopoly is characterized by a small number of firms producing either homogeneous or differentiated products, with each firm having significant market power.