Problem 23 What two lines on a cost curve d... [FREE SOLUTION]

Chapter 8: Problem 23

What two lines on a cost curve diagram intersect at the shutdown point?

Short Answer

Expert verified

The two lines on a cost curve diagram that intersect at the shutdown point are the Average Variable Cost (AVC) curve and the Marginal Cost (MC) curve.

Step by step solution

Identify the cost curves

A cost curve diagram typically includes several curves representing various costs a firm faces: 1. Average total cost (ATC) curve, which represents the firm's average cost per unit of output including fixed and variable costs. 2. Average variable cost (AVC) curve, which represents the average cost of variable inputs per unit of output. 3. Marginal cost (MC) curve, which represents the additional cost incurred by the firm when producing one more unit of output. In this exercise, we are interested in the intersection of two curves in the context of the shutdown point.

Understand the shutdown point

The shutdown point is the point at which a firm can no longer cover its variable costs while producing goods and decides to temporarily stop production. At the shutdown point, the price a firm receives for its output is equal to the minimum average variable cost.

Identify the intersection of cost curves at the shutdown point

At the shutdown point, the price a firm receives for its output is equal to its minimum average variable cost. This means that the shutdown point occurs where the AVC curve is at its lowest point. In addition, the marginal cost curve represents the additional cost incurred by the firm when producing one more unit of output. This curve intersects the average variable cost curve at its lowest point because the additional cost of producing one more unit equals the average cost at that production level. Thus, the two lines on a cost curve diagram that intersect at the shutdown point are the Average Variable Cost (AVC) curve and the Marginal Cost (MC) curve.