Question

Karen is a good friend who is studying economics. She wants to know about marginal cost. You can tell Karen that when marginal cost is:

A. Increasing, then average total cost must also be increasing.

B. Falling, then average total cost could be either falling or rising.

C. Falling, then average total cost must also be falling.

D. Rising, then average total cost could be either falling or rising.

E. All the other answers are incorrect.

Answer 1

Answer: B

Step-by-step explanation:

The correct answer is B. Falling, then average total cost could be either falling or rising.

When the marginal cost is falling, it means that the cost of producing an additional unit is decreasing. This could be due to economies of scale, where as production increases, the cost per unit decreases.

However, the average total cost (ATC) could either be falling or rising. This is because the ATC takes into account the total cost of producing all units, not just the additional unit. If the marginal cost is falling at a faster rate than the ATC, then the ATC will be falling. On the other hand, if the marginal cost is falling at a slower rate than the ATC, then the ATC will be rising.

Let's consider an example to illustrate this concept. Imagine a company that produces shoes. Initially, the company experiences economies of scale, so the marginal cost of producing each additional shoe decreases. However, if the company reaches a point where it starts experiencing diseconomies of scale, the marginal cost may start to increase, while the ATC continues to fall due to the previous economies of scale.

Therefore, when the marginal cost is falling, the average total cost could be either falling or rising, depending on the relationship between the marginal cost and the ATC.