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Question
Answer the following question.
Explain the relation between the Average Variable Cost (AVC) curve and the Marginal Cost (MC) curve. Use diagram
Solution
- When AVC is falling up to point y, MC falls at a faster rate up to point x and stays below the AVC curve.
- When AVC is rising after point y, MC rises at a faster rate after point x and remains above the AVC curve.
- When AVC is at minimum point (i.e at point y), MC is equal to AVC.
- MC curve cuts the AVC curve at its minimum point at y.
- The minimum point of the MC curve (x) will always lie left to the minimum point of AVC curve (y).
- AVC and MC both are derived from TVC.
`"AVC" = "TVC"/"Q"`
`"MC" = (Δ"TC")/(Δ"Q") = (Δ"TVC")/(Δ"Q")`
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