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u-shaped average cost curves

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Explain how the Law of Diminishing Marginal Product results in u-shaped average cost curves, both Average Total Cost (ATC) and Average Variable Costs (AVC). Hint: First explain how Marginal Product (MP) and Marginal Cost (MC) are related and then explain how MC is related to ATC and AVC.

The transit authority is considering raising the cost of a trip by 1%. They have estimated that this increase will lead to a 1.5% decrease in the number of riders. They had decided to raise fares if total expenditures will increase. What do you recommend?

"A firm cannot experience both economies of scale and diminishing marginal product." Do you agree or disagree? Why?

It has been reported that the severe drought being experienced in parts of the United States is resulting in less grass for dairy cattle to eat. As a result, the dairy cattle are producing less milk, which has resulted in an increase in milk prices. Why has less milk production caused milk prices to increase?Assuming dairy farmers can switch to another form of making a living, should they stay in dairy farming in the short run?

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Solution Summary

Law of Diminishing Marginal Product is examined.

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It results in a U shaped curve for both ATC and AVC when the firm starts to produce quanity more than economies of scale (in other words, where each additional unit produced increases the MC of the product). Consider an example in the attached excel sheet, where each labor can produce 100 units for the first 5 labor and the productivity decreases to 50 units per labor after ...

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Gaurav Agarwal, MS
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  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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