Hi, please help me with this econs question! thanks!
I'm asked to sketch the average and marginal cost curves of a software company, in which when it first starts up, the costs are extremely high. (High start up costs, millions of dollar spent to make the software)But after it has made the software, the costs in distributing it to customers "entails low incremental costs that is virtually zero".
So should the MC and AC curves be U shaped or can they simply be sloping downwards because of the economies of scale? How should the curve look like?
Please help! thanks! i've looked through my textbook and i still feel very confused.
To sketch the average cost (AC) and marginal cost (MC) curves of a software company, we need to understand the concept of economies of scale. Economies of scale occur when the average cost of producing a good decreases as the level of production increases.
In the case of the software company, you mentioned that there are high start-up costs, but after the software is made, the costs of distributing it to customers are virtually zero. This suggests that the company benefits from economies of scale.
Typically, in the early stages of production, the MC curve may be upward sloping due to the high start-up costs. As production increases, the MC curve may start to slope downward, reflecting the economies of scale.
The AC curve, on the other hand, is calculated by dividing the total cost (TC) of production by the quantity of output (Q). Therefore, the AC curve will also show the impact of economies of scale. Initially, the AC curve may be high due to the high start-up costs, but as production increases, the average cost will start to decrease, indicating economies of scale.
So, to summarize, it is likely that both the MC and AC curves will first be upward sloping due to high start-up costs. However, as the company benefits from economies of scale, both curves should start to slope downward.
When sketching these curves, keep in mind that the shape may vary depending on the specific production function and cost structure of the software company. The important thing is to show the initial upward slope and then a downward slope as economies of scale come into play.