IGCSE/GCSE/O & A Level/IB/University Student Forum
Qualification => IB => Queries => Topic started by: aangel42 on February 06, 2011, 07:27:28 am
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Hey guys,
I have an Economics HL Test tomorrow on Section 2.3 - Theory of the Firm and I have two questions that I really don't understand so if anyone could explain or answer them for me, I'd REALLLLLY appreciate it! :] Here they are:
1) WHY does the MC curve intersect the AVC and ATC curves at their minimum points?
and
2) Why is the MR curve twice as steep as the AR curve in the demand curve for a monopolist?
Thanks sooo much in advance!
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1) WHY does the MC curve intersect the AVC and ATC curves at their minimum points?
The marginal cost curve and the average total cost curve intersect at the minimum point of average total cost. If marginal cost is below average total cost, average total cost will decline toward marginal cost. If marginal cost is above average total cost, average total cost will increase. MC curve would give us the lowest cost per unit. That's why it intersects.
2) Why is the MR curve twice as steep as the AR curve in the demand curve for a monopolist?
Think of the effect incremental increases in quantity have on total revenue. Make a simple graph with a demand curve and draw boxes representing total revenue. Notice how the total area of the box (representing the total revenue) varies as quantity increases. With a linear demand curve, as you move down the curve the box becomes larger and larger in area until you reach the curve's midpoint. This means that the MR up to this point was positive because TR was increasing. After this point the area of the box declines, this means that from this point forward the MR is negative because TR is decreasing. This is why the MR curve hits zero at half the quantity the demand curve hits zero.
Hope this helps.
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Wow!!! it is an interesting topic that I was interested in it.