Assignment 1 POE summer

2020-21
1.Discuss the relationship between AC, AVC and MC. Explain
why MC will pass through the minimum point of both AC and
AVC.
Ans: When marginal cost is more than average cost, average cost has a tendency to rise. It
seems as if marginal cost curve is pulling the AC curve upward. On the other hand,
when MC is less than AC, it pulls the AC curve downward. When MC is equal to AC then the
latter is constant.

The point of intersection between the MC and AC curves is also the minimum of the AC curve.

This can be explained by the fact that when the cost of the marginal output is equal to the
average cost of the output, then the AC neither falls nor rises (i.e. it reaches its minimum).

It happens because when Average Variable Cost (AVC) falls, Marginal Cost (MC) is less

than AVC. When AVC starts rising, MC is more than AVC. So, it is only curve cuts AVC is
constant and at its minimum point, that MC is equal to AVC. Therefore, MC curve cuts AVC
curve at is minimum point.

2 Explain why AC, AVC and MC are U-shaped. Discuss in this

context the role of law of diminishing marginal
productivity.
3 what is the difference between slope and price elasticity of
a demand curve? Discuss with the help of a numerical
example and suitable diagrams.
4 Define a competitive firm. Explain why it is a price taker
and not a maker. Discuss with the help of a diagram.