Question

If the marginal cost is lower than the average total cost, what will happen to the average total cost after the next unit is produced. Show with an example.

Answer 1

Suppose the total cost function is C = 50 + 3Q^2

In this case average total cost is AC = 50/Q + 3Q and that the marginal total cost is MC = 6Q

Suppose Q is 2 then marginal cost is $12 and average cost is $31. In this case marginal cost is lower than average cost

Now the next unit is produced with a marginal cost of 6 x 3 which is $18. At Q = 3, average total cost is 25.6

this shows that if marginal cost is less than average total cost average total cost must be declining.