The Theory of Imperfect Competition When average costs decline in output, marginal cost is always less than average cost Suppose the costs of a firm, C, take the form C=F+CXO This is a linear cost function The fixed cost in a linear cost function gives rise to economies of scale, because the larger the firms output, the less is fixed cost per unit The firms average costs is given by AC=C/O-F/0+c (6-4) Copyright C 2003 Pearson Education, Inc Slide 6-13Copyright © 2003 Pearson Education, Inc. Slide 6-13 – When average costs decline in output, marginal cost is always less than average cost. – Suppose the costs of a firm, C, take the form: C = F + c x Q (6-3) – This is a linear cost function. – The fixed cost in a linear cost function gives rise to economies of scale, because the larger the firm’s output, the less is fixed cost per unit. – The firm’s average costs is given by: AC = C/Q = F/Q + c (6-4) The Theory of Imperfect Competition