Chapter 8: Problem 30

The marginal cost curve intersects the average variable cost curve at the _____. a) shut-down point b) break-even point c) maximum profit point

Short Answer

Expert verified

The marginal cost curve intersects the average variable cost curve at the \(a)\) shut-down point. This is because when the two cost curves intersect, marginal cost equals the average variable cost, meaning producing another unit will have no impact on the average variable cost. The shut-down point represents the critical point at which the firm will choose to halt production if prices fall below the average variable cost and continue production if prices are above it.

Step by step solution

Understanding Marginal Cost

Marginal cost refers to the cost of producing one additional unit of output. It is defined as the change in total cost when producing an additional unit of a product.

Understanding Average Variable Cost

Average variable cost is the variable cost per unit of output. It's calculated as the total variable cost divided by the quantity of output produced.

Relation between Marginal Cost and Average Variable Cost

When marginal cost is below the average variable cost, it means that producing an extra unit will bring down the average variable cost. Conversely, if marginal cost is above the average variable cost, it implies that producing an additional unit will increase the average variable cost. Thus, when the two cost curves intersect, marginal cost equals the average variable cost. This means that producing another unit will have no impact on the average variable cost.

Analyzing the options

a) Shut-down point: This is the point at which the firm will choose to temporarily halt production rather than continue to operate at a loss. In this case, the intersection point refers to the instance when the price is equal to or lower than the average variable cost. b) Break-even point: At this point, the firm's total revenue equals its total cost, resulting in zero economic profit. The break-even point is not necessarily the intersection point of marginal cost and average variable cost curves. c) Maximum profit point: This occurs at the output level where the difference between total revenue and total cost is greatest.

Conclusion

From the analysis, we can deduce that the correct answer is a) shut-down point. This is because when the marginal cost curve intersects the average variable cost curve, it represents the point at which the firm's operating costs are minimized and producing an additional unit will not impact the average variable cost. This is the critical point at which the firm will choose to shut down if prices fall below the average variable cost and continue production if prices are above it.