Assignment Essay Example | Topics and Well Written Essays - 500 words - 66

Assignment - Essay Example her, based on the above graph it can be observed that the maximum profits are obtained at a point where Marginal cost curve intersect with Marginal revenue curve. In addition the marginal cost curve intersect the average variable cost curve from below and also intersect the average total cost curve from above as shown in the diagram. The diagram above indicate that, in the long run, an increase in cost for a monopolistic firm it causes the market price to be equal to average total cost whereby marginal cost will be equal to marginal revenue as indicated in the figure above (Salvatore, p.345). The graph above indicates the equilibrium price and quantity which is derived at point where the demand and supply curve intersect. The equilibrium price is represented above using PE while equilibrium quantity is represented by point QE as shown above. 7. The demand for butter will lead to a decrease in demand of margarine because margarine is an inferior good whose demand decreases as consumer’s level of income increases. On the contrary, demand of butter will increases as income increase. 8. The reason why person marginal rate of substitution between two goods must equal to the ratio of the price of goods is because consumer could trade one good for another at a market price to obtain higher level of satisfaction. The graph above indicates that marginal cost curve intersect average cost curve from below and average cost at a point higher than that of average cost curve. It can be observed that, as the marginal cost increases, the average variable cost decreases (Salvatore, p.225). The graph above indicates the relationship between Marginal cost and average variable cost whereby, If marginal cost of production is greater than average variable cost it means that average cost is increasing and vice versa(Salvatore, p.225). The graph indicates that the firm average variable cost curve are U-shaped and it achieve its minimum at a lower than the average total cost curve