Question

Which of the following best describes the relationship between marginal cost and average cost of production?

A)   Total cost minimisation occurs at the point where marginal cost equals average cost.

B)   When marginal cost exceeds average cost, average cost must increase with output.  

C)   When marginal cost equals average cost, total revenue must be maximised.

D)   Average cost increases at a diminishing rate if marginal cost is positive.

Answer 1

The Shape of MC is U shape, it means initially MC decreases with the increase in the output and after production of some output, the MC become minimum and after this MC starts increasing.

When MC was below ATC, then ATC was declining after that MC cuts ATC at its minimum point after that ATC starts increasing. ATC is U shaped but MC is upward sloping U shape curve.

It means ATC curve is always U shaped.

Hence in the context of the relationship between MC and ATC, it can be said that when marginal cost exceeds average cost, average cost must increase with output.  

Hence option B is the correct answer.