Problem Set

Macroeconomics
Macro economics by Kevin Dooley available under a CC BY 2.0 License.
The problem set each week provides a worthwhile review and tests you on concepts in order to assess your acquisition of knowledge.
This week you will work on Marginal Cost and ATC problems.

Activity Details
Watch Jacob Clifford's Micro 3.4 Marginal Cost and ATC--Why Do Cost Curves Do That? and answer the following questions.

1. Draw graphs that show the relationship between the MP and the MC (2 points).

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2. Answer these questions about your graph:

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a) What economic concept causes the MP curve to up down and then go down?
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The economic concept that causes the MP curve to go up down and then go down is the Law of Diminishing
returns, which is when quantity labor increases to a point in which level of profits or benefits gained is less
than the amount of money or energy invested. So the MP curve is slow, and only one laborer is doing all the
work. Once they add more, labor starts to specialize, and produce more, but once there are too many workers,
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productivity decreases, causing the curve to go down.

b) What economic concept causes the MC to go down and then go up?

3. Draw the graph that shows the MC, AVC and ATC (3 points)?
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4. Answer these questions about your graph.

a) Why is there a gap between the ATC curve and the AVC curve and why does that gap get smaller as unites
increase?
The ATC is made up of all of the average of AVC and fixed cost, while variable cost is the average of just
variable costs divided by output. That is why there is a gap between the two because there is a difference in
inputs when calculating said averages. The gap gets smaller as unites increase because as time goes by and as
the company grows variable costs increase proportionally to the number of items produced, while fixed costed

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 spread among all items of production, so the gap becomes smaller because the inputs of both ATC and AVC
become very similar, and are divided by the same variable (Output or Quantity produced).

d) Why does the marginal cost go down when the average cost is first going down?
The marginal costs go down when the average cost is first going down because if the marginal cost is below
the average cost, it will pull the ATC down, but if the MC is above the ATC it will pull the average up. This is
because when marginal costs is low it pulls the average down like if the weight is 60lbs and the average is
110lbs. But if the weight was 300lbs, which is well above the average weight of 110lbs, it will increase the
average weight to a higher weight.

e) Why does the marginal cost hit a minimum and then go up?
Marginal costs hits a minimum and then go up because as quantity of units is produced, the cost begins to fall
because the increase in labor start to specialize and there is an increase in production which makes costs fall,
but it then increases when each worker added produces less product, the cost still increase, but production
decreases.
f) Why does the marginal cost intersect the minimum of the ATC and AVC?

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The marginal cost intersects the minimum of the ATC and AVC because the marginal cost is part of ATC, so

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when there is a change in MC, it will affect the total cost. When the MC starts to increase, it might be below
the ATC, and AVC, but once it increases, but increases below the ACT and AVC then the ACT and AVC is

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decreasing while the MC is increasing, so when MC increases till the point where the MC intercepts with the
ACT and AVC lowest point, and once MC is above the units of ATC and AVC, both ATC and AVC will

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increase.
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5. Explain economies of scale, constant returns to scale and diseconomies of scale (3 points).
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Economies of scale, constant returns to scale and diseconomies of scale are all terms used to describe what
happens when the scale of production increases. Economies of scale is a term that explains production process
in which an increase in the number of units produces causes a decrease in the average cost of each unit.
Constant returns to scale refers to the technical property of production that examines the change in output that
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causes a proportional change in all inputs. If output increases, the same increase will proportionally change,
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leaving a constant returns to scale. Diseconomies of scale is a term used to describe the process that does not
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conform to the economies of scale because the costs for production does not decrease with the increased
production.
6. Complete the table below so that you can learn the characteristics of different market structures (1 point each
row).
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