If C=C(q) is a firm's total cost function, the quantity & is called the elasticity C dq of cost at the output q . Discuss the relationship between marginal cost and average cost for the intervals of ɛ being higher and lower than 1
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A:
Cost function of a firm,
C= C (q)
The elasticity of cost,
We know,
Average cost,
AC= C/q
Marginal cost,
MC = dC/dq
Using MC and AC, the elasticity of cost can also be written as
The elasticity of cost at q is equal to the ratio of MC and AC. It uses to tell whether there is economies of scale or diseconomies of scale.
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