Econ Q

[alpenchev]

Just want to make sure I get this right. Monopoly's Marginal cost curve can be a horizontal line meaning the change in output will be the same as the change in cost. The change in total cost will come from the increase in variable cost and it would be the same for each additional unit of output.
So the general U-shape of the marginal cost will not be in effect, meaning that the marginal cost will not decrease as we initially increase output, and increase as the output keep increasing. Can anybody explain why is this possible?

 

[chadtap]

If I understand the question correctly, the MC curve could be horizontal if you are dealing with a natural monopoly. In this sense MC would act as a variable cost, and thus as with a natural monopoly, fixed costs would have to increase the more you produce. For example, think of a power plant that can produce up to X amount of power per day. VC/MC are going to be consistent because it doesn�t matter if you supply a little amount of power up to X amount of power per day, the costs are the same. What would change is when you need power beyond X and therefore would have to build another power plant, thus increasing Total Costs and Average Total Costs. So the average total cost curve would be "u-shaped" but the MC curve would be horizontal.

I hope that make some sense... Anybody please feel free to correct me if I am wrong.

 

[KrukVT]

<Monopoly's Marginal cost curve can be a horizontal line meaning the change in output will be the same as the change in cost. >

No. That would mean marginal cost is constant no matter what level of output.

<If I understand the question correctly, the MC curve could be horizontal if you are dealing with a natural monopoly.>

In a natural monopoly the average total cost curve has a negative slope throughout the entire range of demand. The MC curve doesn't have to be horizontal.

 

[chadtap]

<In a natural monopoly the average total cost curve has a negative slope throughout the entire range of demand. The MC curve doesn't have to be horizontal.>

I beleive this is only true in the Short Run... Would increase again in the long run as "fixed costs" (which become variable) rise. True... MC curve doesnt have to be horizontal, but in a natural monopoly it would be pretty elastic.

 

[alpenchev]

KrukVT,
Marginal Cost is the increase in total cost divided by the increase in output. So in order to get the same constant MC we need to have the same amount of increase in Total Cost (compared to the previous level of TC) and the same amount of increase in Output (compared to the previous level of output), right?