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Economics and the 2008 crisis: a Keynesian view
Economics and the 2008 crisis: a Keynesian view

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Average cost and marginal costs (2)

Activity 24

Task (a)

(a) On the figure below, click on the marginal cost curve to show the point at which marginal costs are at a minimum.

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Figure 42 A firm's short run average cost and marginal cost curves
Interactive feature not available in single page view (see it in standard view).

Task (b)

(b) Determine the point where marginal costs equal average cost.

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Figure 43
Interactive feature not available in single page view (see it in standard view).

Task (c)

(c) Complete the following:

When marginal cost is less than average cost, increasing output will mean average cost (select one answer):

a. 

Rises


b. 

Falls


c. 

Stays the same


The correct answer is b.

Answer

Yes, if marginal cost is less than average cost, producing an additional unit will reduce average cost.

Discussion

When marginal cost is less than average cost, average cost will fall. Average cost falls as output increases because the cost of producing one extra unit (the marginal cost) is lower than average cost.

Note, once marginal cost is greater than average cost, then increasing output will result in higher average cost. For instance, at a quantity of 8000 per day, average cost is less than marginal cost, so increasing output results in higher average cost.