Question

What happens along the average total cost curve as:

a) Marginal product is increasing?

b) Marginal cost is decreasing?

c) Average variable costs are decreasing?

d) Total product increases at a decreasing rate?

Answer 1

a) when marginal product is increasing, average cost is decreasing Because of increasing returns implies decreasing cost.

b) when marginal cost is decreasing, average cost lies above it and decreases as from the relationship between MC and AC, MC curve intersects AC at its minimum.

c) when average variable costs are decreasing then average cost also decreases because the slope is same and the distance between the two diminishes as average fixed cost is declining.

d) when total product increases at a decreasing rate, marginal product diminshes implies average cost curve will be increasing.