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Suppose that the average total cost of production for a firm is $56 and the marginal...

Suppose that the average total cost of production for a firm is $56 and the marginal cost of increasing output by one unit is $72. Which one of the following statements is TRUE?

Select one:

a) If the firm were to increase output by one unit, average total costs will fall.

b) If the firm were to increase output by one unit, average total costs will rise.

c) If the firm were to increase output by one unit, average total costs will stay the same.

d) If the firm were to increase output by one unit, average total costs may rise, fall, or stay the same.

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Answer #1

The marginal cost of increasing output by one unit is $72

The average total cost of production of the firm is $56

Marginal cost of increasing output is greater than the average total cost of production.

In this case, on increasing the output, the average total cost will shoot up.

For example, the firm's output is 10. The average total cost is $56. So, total cost = $560. On increasing one unit of output, the marginal cost is $72. For the 11th unit, the total cost is $560+$72 = $632. Average total cost = $632/11= $57.45.

So, the average total cost increases.

Answer: b) If the firm were to increase output by one unit, average total costs will rise.

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