What relationships do a firm's short-run cost curves show?
What will be an ideal response?
The marginal cost (MC), average total cost (ATC) and average variable cost (AVC) curves are all related in the short run:
• When the MC curve lies above (lies below) the AVC curve, the AVC curve rises (falls) with output. This implies that as output increases, the MC curve cuts through the AVC curve at its lowest point.
• When the MC curve lies above (lies below) the ATC curve, the ATC curve rises (falls) with output. This implies that as output increases, the MC curve cuts through the ATC curve at its lowest point.
• As output increases, the ATC curve becomes vertically closer to the AVC curve.
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When the price of a good changes, other things constant, what occurs?
A) The supply curve shifts to the right. B) The supply curve shifts to the left. C) The supply curve becomes flatter. D) The supply curve becomes steeper. E) Only quantity supplied changes.
Assume two locally owned used car dealerships that have been in direct competition for many decades. They have a choice of selling high-quality cars at a high price but also high costs because of the repairs that have to be made
The other choice is to sell low-quality cars at a low cost but market them as high quality cars. Explain using game theory why it is in the interest of both of these companies to continue to sell high-quality cars but it may not necessarily be in the interest of a new out-of-town dealership that has recently moved into town to do the same.