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Learning Curve Effect
$ MC=20Q
AVC=10Q
200
0
ATC=1,000Q –1+10Q
10
Q
FIGURE 6.3
minimized where Q = 0. Substituting this into the AVC equation, we obtain AVC = 10(0) = 0 In other words, at zero output the firm incurs only fixed cost, that is, 2
TC = 1, 000 + 10(0) = TFC Again, the marginal cost equation is MC = 20Q Marginal cost at Q* = 0 is MC = 20(0) = 0 Again, not surprisingly, MC = AVC at the output level that minimizes AVC. c. Figure 6.3 diagrams the answers to parts a and b.
LEARNING CURVE EFFECT The discussion in Chapter 5 noted that the profit-maximizing firm will operate in stage II of production. It will be recalled that in stage II the marginal product of a factor, say labor, is positive, but declining at an increasing rate. The phenomenon is a direct consequence of the law of diminishing marginal product. At constant factor prices this relationship implies that as output is expanded, the marginal cost of a variable factor increases at an increasing rate. An important assumption implicit in the law of diminishing marginal product is that the quality of the variable input used remains unchanged.
