Question

Average cost will be a minimum at a level of firm output that is:

A

greater than where diminishing returns begin.

B

where total product is at a maximum.

C

where average product is at a minimum.

D

where marginal cost is at a minimum.

E

where marginal product is at a maximum.

Answer 1

Option A is correct

When total product is maximum, marginal product is zero and average product is decline which means average total cost is increasing. when average product is minimum average total cost is maximum. When marginal cost is minimum average total cost is not minimum but it is declining. However when there are diminishing returns, marginal product is declining in marginal cost is increasing, but average total cost has not yet achieved its minimum. the output level which minimises average total cost is greater than the output level which minimises marginal cost. This is also greater than the output level that makes marginal product starts diminishing.