If marginal cost is greater than average variable cost, average variable cost will:

The Costs of Production

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concept

Average Cost and Marginal Cost

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2

concept

Patterns of MC, AFC, AVC, and ATC curves

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Average total cost would decrease.

Average total cost would increase.

Marginal cost would decrease.

Marginal cost would increase.

Average total cost and marginal cost

Average total cost and average fixed cost

Average variable cost and marginal cost

Average variable cost and average fixed cost

Marginal cost is $10 and average variable cost is $12

Marginal cost is $12 and average variable cost is $10

Marginal cost is $10 and average total cost is $12

Marginal cost is $12 and average total cost is $10

Solution:

The correct choice is option b.

AVC (average variable cost) is the mean of the TVC (total variable cost) or TVC divided by the quantity (Q). AVC is the per-unit variable cost of producing Q. ATC (average total cost) is the mean of the total cost (TC) or TC divided by Q. ATC is the per-unit cost of producing Q. The min. (minimum) points of AVC and ATC lies where they intersect the MC (marginal cost) curve. MC is the additional or extra cost borne to make one additional unit. When MC is higher or above AVC or ATC curves, then it will increase the AVC and ATC values, that is AVC and ATC will be upward sloping or rising. In other words, when the MC of making one unit is more or larger than the average cost (AVC or ATC) of producing it, the MC will increase the average costs (AVC or ATC). When MC is lower or below AVC or ATC curves, then it will decrease the AVC and ATC values, that is AVC and ATC will be downward sloping or falling. In other words, when the MC of making one unit is lesser or smaller than the average cost (AVC or ATC) of producing it, the MC will decrease the average costs (AVC or ATC). So, the minimum points of ATC and AVC will only lie where MC is intersecting each of them respectively.

Option a is not correct as when MC is below AVC and ATC, both curves are falling. So, minimum point of them is not reached. Option c is not as ATC and AVC do not intersect. Option d is not correct as the TC’s slope does not determine the min. points of AVC or ATC.

Solution:

The marginal cost (MC) curve is the u-shaped curve that is the locus of the cost of creating an additional unit. The marginal product (MP) curve is the inverted u-shaped curve which is the locus of the additional output generated when additional or extra input is added. The MC and MP are inversely related, that is as one rises the other falls. In other words, as the cost of creating an additional unit rises, the extra output added by the additional input falls. So, the correct choice is option c.

Option a is not correct as MC rises, it adds to the variable cost which has an ambiguous result on the average variable cost. Option b is not correct as the average fixed cost (AFC) is not rising, it is falling with increasing output. Option d is not correct as MC and MP are inversely related, so as MC rises MP falls.

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