Question

When marginal cost is below average variable cost, average variable cost must be:______a. At its minimum. b. At its maximum. c. Falling. d. Rising.

Answer 1

Answer:

c. Falling

Explanation:

Marginal costs — additional OR incremental costs for the production of an additional unit of the product, equal to the change in total costs divided by the change in the volume of production (and in the short term - the change in total variable costs divided by the change in production).

Average Variable Cost (AVC) is the total variable cost per unit of output. This is found by dividing the total variable cost (TVC) by the total output (Q). Total Variable Cost (TVC) is all costs that vary with output and material. The easiest way to determine if a cost is volatile is whether the product has changed.  Profit companies will use AVC to determine where production will close in the shortest possible time. If the product they buy for good is higher than AVC for the product they produce, they pay at least all the variable costs and some fixed costs.

Since MC is the cost of producing the next unit, the AVC should fall when it is under AVC. AVC falls because MC costs the next unit produced; therefore, when the next unit costs less than the average, it should be pulling the average down. With the same logic, when MC is above AVC, it pushes the average upwards, so the AVC needs to rise. When the marginal unit is more expensive than the average, the average should increase. By definition, the MC curve intersects the AVC curve at the minimum point in the AVC curve. At the junction MC and AVC are equal.