Question

If the short-run average variable cost of production for a firm is decreasing, then it follows that?

1) average variable cost must be above average fixed cost
2) average fixed cost must be constant
3) marginal cost must be decreasing
4) marginal cost must be below average variable cost

Answer 1

If the short-run average variable cost of production for a firm is decreasing, it means that the marginal cost must be decreasing.

Step-by-step explanation:

The correct answer is 3) marginal cost must be decreasing.

If the short-run average variable cost of production is decreasing, it means that the cost of producing each additional unit of output is decreasing. This implies that the marginal cost, which represents the cost of producing one additional unit of output, must be decreasing as well. When the marginal cost is decreasing, it indicates that the firm is experiencing economies of scale and becoming more efficient in production.

For example, let's say a firm originally produces 10 units of output with an average variable cost of $20. If the firm then increases production to 11 units and the average variable cost decreases to $18, it means that producing the 11th unit only costs $18, which is lower than the average cost of $20. This demonstrates that the marginal cost for producing the additional unit is decreasing.