Question

Suppose you have the following values for a short-run production process: Q = 20, VC = 100, FC = 600 and MC = 40. Given this, we know that the:

a. Average cost curve must be decreasing
b. Average cost curve must be increasing
c. Marginal cost curve must be decreasing
d. Marginal cost curve must be increasing

Answer 1

The correct answer here is B) average cost must be increasing.

Step-by-step explanation:

Here for finding out whether the average cost would increase or decrease , we have to see the relationship between average cost and marginal cost , where if marginal cost is less than average cost than the average cost would decrease ,and when the average cost is less than marginal cost that means the average cost would increase. Here as per given information-

Average cost = Total cost / Quantity

where Total cost = Fixed cost + Variable cost

Total cost = 600 + 100

= 700

Average cost = 700 / 20

= 35.

So here the marginal cost is greater than average cost that , means the average cost will be increasing.