For this Short Run firms costs, explain the SHAPE of each curve: MC, ATC and AVC. Where would the AFC be located and why?

ENGR.ECONOMIC ANALYSIS
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For this Short Run firms costs, explain the SHAPE of each curve: MC, ATC and AVC. Where would the AFC be located and why? 

 

'W
P2
P1
Q1 Q2
MC
ATC
AVC
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Transcribed Image Text:'W P2 P1 Q1 Q2 MC ATC AVC www.economicshelp.org
Expert Solution
Short Run

In the short run we assumes that in order to change the output the firm have to adjust its labor stock. Because other factors of production can't be changed. Hence the law of diminishing marginal returns applies in the short run. Which say that in the first phase the marginal product of labor increasing, after a point in the second phase the marginal product decreasing (but is positive). And in the final phase the marginal product goes into the negative territory. 

As labor is the only variable input the firms have. Hence in the phase of increasing marginal product of labor the firm would be experiencing decreasing marginal cost. And in the phase of decreasing marginal product of labor, the firm would be experiencing increasing marginal cost. 

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