Chapter 8: Problem 23

What two lines on a cost curve diagram intersect at the shutdown point?

Short Answer

Expert verified

The two lines on a cost curve diagram that intersect at the shutdown point are the average variable cost (AVC) line and the marginal cost (MC) line. This intersection represents the minimum point on the AVC curve, below which it would be more cost-effective for the firm to stop production.

Step by step solution

Identify the Average Variable Cost Line

The Average Variable Cost (AVC) line on a cost curve diagram represents the cost per unit of output that a firm incurs in the short run. This cost is variable because it changes with the level of output. As output increases, the average variable cost decreases initially due to gains from economies of scale and then begins to increase due to diseconomies of scale.

Identify the Marginal Cost Line

The Marginal Cost (MC) line is the cost of producing one additional unit of output. Initially, as output increases, marginal cost decreases due to the more efficient use of resources. But after a certain point, the marginal cost starts to increase as additional output requires more and more resources.

Understand the Intersection of the AVC and MC Lines

Where the AVC line and MC line intersect is called the point of efficient scale or the shutdown point. This is the level of output where average variable cost is minimized. At this point, the marginal cost equals average variable cost.

Understand the Significance of the Shutdown Point

If the market price falls below the shutdown point, that signals the firm should cease production. At any price below the minimum average variable cost, a firm would not be covering its variable expenses and would minimize losses by halting production.

Final Summary

In conclusion, the two lines on a cost curve diagram that intersect at the shutdown point are the average variable cost (AVC) line and the marginal cost (MC) line. This intersection indicates the minimum point on the AVC, below which it would be more cost-effective for a firm to stop production.