b. Show the average cost, marginal cost, and average variable cost curves on a graph.
Average cost is u-shaped. Average cost is relatively large at first because the firm is
not able to spread the fixed cost over very many units of output. As output increases,
average fixed costs will fall relatively rapidly. Average cost will increase at some
point because the average fixed cost will become very small and average variable cost
is increasing as q increases. Average variable cost will increase because of
diminishing returns to the variable factor labor. MC and AVC are linear, and both
pass through the origin. Average variable cost is everywhere below average cost.
Marginal cost is everywhere above average variable cost. If the average is rising,
then the marginal must be above the average. Marginal cost will hit average cost at
its minimum point