1. The Average Cost Curve usually has a U-shape is because fixed costs are all incurred before any production takes place and marginal costs are typically increasing and because of diminishing marginal productivity. In this "typical" case, for low levels of production there are economies of scale: marginal costs are below average costs, so average costs are decreasing as quantity increases. In simple words, it is due to ecomomies of scale and diseconomies of scale.
Economies of scale: Average cost per unit of output falls as the firm increases output.
2. Relationship between Average Cost and Marginal Cost: When average cost is declining as output increases, marginal cost is less than average cost. When average cost is rising, marginal cost is greater than average cost. When average cost is neither rising nor falling (at a minimum or maximum), marginal cost equals average cost.
Relationship between Marginal Cost and Profit Maximisation: Profit maximization is the process by which a firm determines the price and output level that returns the greatest profit. There are several approaches to this problem. The total revenue -- total cost method relies on the fact that profit equals revenue minus cost, and the marginal revenue -- marginal cost method is based on the fact that total profit in a perfectly competitive market reaches its maximum point where marginal revenue equals marginal cost.
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