Average cost and marginal costs (2)
(a) On the figure below, click on the marginal cost curve to show the point at which marginal costs are at a minimum.
(b) Determine the point where marginal costs equal average cost.
(c) Complete the following:
When marginal cost is less than average cost, increasing output will mean average cost (select one answer):
Stays the same
The correct answer is b.
Yes, if marginal cost is less than average cost, producing an additional unit will reduce average cost.
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.