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.
Certainly! Let's break down the concept of average cost (AC) and marginal cost (MC) curves and how they relate to the situation you described.
The average cost (AC) is calculated by dividing the total cost of production by the quantity produced. It represents the cost per unit of output. On the other hand, the marginal cost (MC) represents the additional cost of producing one more unit.
In the case of a software company with high startup costs and low incremental costs, the initial startup costs will be reflected in high average costs. As the company starts producing and distributing the software, the low incremental costs will lead to a decline in average costs.
Considering the given information, the shape of the average cost (AC) curve will likely resemble a downward slope due to economies of scale. Economies of scale occur when production increases, leading to a decrease in average costs. This can be attributed to factors like spreading fixed costs over a larger quantity of output or taking advantage of bulk purchasing discounts.
The marginal cost (MC) curve, however, could be slightly different. Since the question mentions that the incremental costs of distributing the software are virtually zero, the marginal cost curve might remain relatively flat or close to zero after the initial startup costs. This reflects the idea that producing additional units does not significantly increase the overall costs for the company.
To summarize, in this scenario, the average cost (AC) curve is likely to slope downward due to economies of scale, while the marginal cost (MC) curve may be relatively flat or close to zero after the initial startup costs.
When sketching the curves, you can start with a high average cost (AC) value at low quantities, gradually decreasing as production increases. As for the marginal cost (MC) curve, it should start high at low quantities and then flatten out or approach zero as production increases.
Remember, the specific shape of the curves may vary depending on other factors at play, but based on the information provided, this general shape should suffice.
I hope this helps clarify the concept for you! Let me know if you have any further questions.