When average total cost is declining then:
a) marginal cost must be less than average cost
b) marginal cost must be greater than average cost
c) average toal cost must be greater than average fixed cost
d) average variable cost must be declining.
My answer is d but my friend thinks a so now i'm not sure as the example i have both fit!
Thanks
The correct answer is d) average variable cost must be declining. When average total cost is declining, it means that the average variable cost is decreasing, while the average fixed cost remains constant.
The correct answer is b) marginal cost must be greater than average cost.
When average total cost is declining, it means that the cost per unit of output is decreasing as production increases. In this situation, the marginal cost (the additional cost of producing one more unit) is less than the average cost (the total cost divided by the number of units produced).
Option a) cannot be true because if the marginal cost is less than the average cost, it would cause the average cost to decline, not increase.
Option c) is not necessarily true because the average total cost can be declining even if the average fixed cost is greater than the average total cost. Average fixed cost represents the fixed cost per unit of output, while average total cost includes both fixed and variable costs.
Option d) is not correct because average variable cost is not necessarily declining when the average total cost is declining. Average variable cost represents the variable cost per unit of output, while average total cost includes both fixed and variable costs.
Therefore, the correct answer is b) marginal cost must be greater than average cost when average total cost is declining.
To determine the correct answer to this question, let's analyze the concept of average total cost (ATC) and its relationship with marginal cost (MC).
Average total cost (ATC) is the total cost per unit of output. It is calculated by dividing total cost (TC) by the quantity produced (Q): ATC = TC/Q.
Marginal cost (MC), on the other hand, is the cost of producing an additional unit of output. It is calculated by taking the difference in total cost when producing one more unit: MC = ΔTC/ΔQ.
Now, let's apply this understanding to the given options:
a) If marginal cost is less than average cost, it means that producing one more unit incurs a lower cost on average. This situation suggests that the current average cost of production is higher than the additional cost required to produce one more unit.
b) If marginal cost is greater than average cost, it implies that producing one more unit incurs a higher cost on average. This situation suggests that the current average cost of production is lower than the additional cost required to produce one more unit.
c) Average total cost being greater than average fixed cost is unrelated to the relationship between average total cost and marginal cost. Average fixed cost (AFC) is the fixed cost per unit of output. It is calculated by dividing total fixed cost (TFC) by the quantity produced (Q): AFC = TFC/Q. The given options do not discuss the relationship between AFC and ATC.
d) If average variable cost (AVC) is declining, it means that the cost of producing each additional unit is decreasing. This situation suggests that the average cost of the variable inputs required to produce each unit is decreasing. However, it does not directly indicate the relationship between ATC and MC.
Based on the explanations above, option d (average variable cost must be declining) is unrelated to the comparison between ATC and MC. Therefore, option a (marginal cost must be less than average cost) is the more suitable answer to the question.
Remember, it is important to thoroughly understand the concepts and relationships between different cost measures to make accurate assessments in economics.