Question

Karen is a good friend who is studying economics. She wants to know about marginal cost. You can tell Karen that when marginal cost is: A. rising, then average total cost could be either falling or rising. B. increasing, then average total cost must also be increasing. C. All of the other answers are incorrect D. falling, then average total cost could be either falling or rising. E. falling, then average total cost must also be falling

Answer 1

Answer –

Karen is a good friend who is studying economics. She wants to know about marginal cost.

Marginal cost (MC) is the additional cost incurred by the firm when it is producing one extra unit of output.

Mathematically, MC = ∆TC/∆Q, where TC = Total Cost and Q = Output.

Average Total Cost (ATC) is the total cost per unit of output and it can be mathematically calculated as ATC = TC/Q.

ATC curve is U-shaped. If MC are increasing, then MC curve intersects the ATC curve at its minimum. MC almost always starts below ATC because of fixed cost. As output increases, ATC will decline gradually and MC increases. Eventually they intersect at the minimum point of the ATC curve, then MC continues to increase and drags ATC up after it.

Thus, I can tell Karen that when MC is rising, then ATC could be either falling or rising.

Thus, correct answer is Option A.