# Relationship between the marginal cost and the average total cost

Question-1     Marks: 5

The table below shows the short run cost for producing bicycles.

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Complete all missing values in table below:

 Marginal cost Average total cost Average variable cost Average fixed cost Total cost Variable cost Fixed cost Output Labor 0 \$60 0 0 70\$ \$60 1 1 \$140 \$60 6 2 \$210 \$60 11 3 280\$ \$60 15 4 \$350 \$60 13 5 \$420 \$60 12 6

1. Draw the short run total cost curve (show the total cost, fixed cost, variable cost).
2. Where the marginal cost and average total cost intercept? Explain the relationship between the marginal cost and the average total cost with the help of graph.

Question 2

1. When do firms decide to shut down production in the short run? Explain it.
2. How is the short run average cost curve and the long run average cost curve shaped? What is the difference between them?

Question 3

The following graph represents the situation of Sindbad’s caps, a firm selling caps in the perfectly competitive caps industry.

• How much output should Sindbad produce to maximize his profit, if the market price is equal to \$11?
• How much profit (loss) will he earn? Indicate the profit (loss) area on the graph.
• Suppose Sindbad decides to shut down. What would his loss be?

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