Question

Explain why, when a firm is producing the quantity that equates its average cost to its marginal cost, it is productively efficient

Answer 1

The marginal cost is the additional cost incurred by the producing an extra unit of the output and the average cost is the average of the total cost of producing the commodity. When the marginal cost is less than the average cost the average costs decreases. This means that producing another unit of the commodity adds less to the average cost. When the marginal cost is above the average cost, the avergae cost increases. This means producing an additional unit of the commodity adds more cost. When the marginal cost is equal to the average cost, the cost producing an additional unit of the commodity would be equal to the average cost. In this point the average cost and the marginal costs are tied up. So a firm can produce this cost point to earn the highest profit. Or the firm can expand their firm capacity until the marginal cost is equal to the average cost.