Question

If the marginal cost of production is greater than the average variable cost of production, then?

1) Average variable cost could be rising or falling because marginal cost and average variable cost are unrelated.
2) Average variable cost is rising because the cost of the last unit produced is adding more to total variable cost than previous units did on average.
3) Average variable cost is rising because the cost of the last unit produced is adding to total variable cost.
4) Average variable cost is falling because the cost of the last unit produced is adding less to total variable cost than previous units did on average.
5) Average variable cost is rising because marginal cost and average variable cost are equal.

Answer 1

When the marginal cost exceeds the average variable cost, it means the average variable cost is rising, as any additional unit produced is more costly than the previous units on average.

Step-by-step explanation:

If the marginal cost of production is greater than the average variable cost (AVC) of production, then the correct answer is 2) Average variable cost is rising because the cost of the last unit produced is adding more to total variable cost than previous units did on average. Marginal cost is defined as the additional cost of producing one more unit of output. This cost directly impacts the AVC when it is above it. As more units are produced, especially when marginal cost is rising due to factors like diminishing marginal returns, this indicates that producing additional units is becoming more expensive than the average cost of the units produced previously. Hence, if the marginal cost is above the AVC, the AVC must be rising.

It's important to recognize that while marginal costs can indicate trends in average variable costs, they do not determine the average fixed costs. Furthermore, average variable costs can only fall if the marginal cost is below the AVC. Since we are considering a situation where marginal cost is above AVC, we can infer that with the production of additional units, the AVC is increasing.