When a firm increased its output by one unit, its Average Cost decreased. This implies that
A)the law of diminishing returns has not yet taken effect
B)MC<AFC
C)MC<AC
D)MC=AC
Do a little research, then take a shot. Hint: draw a picture; the MC must cut the AC curve a the minimum point of the AC curve.
To answer this question, we need to understand the relationships between average cost (AC), marginal cost (MC), and the law of diminishing returns.
The average cost is calculated by dividing total cost (TC) by the quantity of output produced. It represents the cost per unit of output.
The marginal cost, on the other hand, is the additional cost required to produce one more unit of output. It measures how the total cost changes with each additional unit of production.
Now, if a firm increases its output by one unit and its average cost decreases, it indicates that the additional unit of production has lower costs than the previous units.
So, let's consider the options:
A) The law of diminishing returns states that as additional units of a variable input are added to a fixed input, the marginal product of the variable input will eventually decrease. Since this question implies that increasing the output by one unit led to a decrease in average cost, it suggests that the firm has not yet experienced diminishing returns. Hence, option A is a possible answer.
B) MC refers to the additional cost of producing an extra unit of output. If MC is less than the average fixed cost (AFC), it means that the additional unit is adding less cost than the average cost per unit. However, the question doesn't explicitly mention AFC, so we cannot conclude that MC is less than AFC. Therefore, option B cannot be determined.
C) Similar to option B, the question does not mention anything about average variable cost (AVC) or average total cost (ATC), so we cannot determine if MC is less than AC (which includes both fixed and variable costs). Thus, option C cannot be determined.
D) MC is equal to AC when the average cost is at its minimum point. This occurs when MC crosses AC at its lowest point on a graph. However, the question does not provide enough information to determine the shape of the average cost curve or whether it is at the minimum point. Therefore, option D cannot be determined.
In conclusion, based on the given information, the best answer is option A: the law of diminishing returns has not yet taken effect.