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What happens to marginal cost when average cost increases?
- a)Marginal cost is below average cost
- b)Marginal cost is above average cost
- c)Marginal cost is equal to average variable cost
- d)Marginal cost is equal to average cost
Correct answer is option 'B'. Can you explain this answer?
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What happens to marginal cost when average cost increases?a)Marginal c...
Relationship between Marginal Cost and Average Cost
Marginal cost and average cost are two important concepts in economics. Marginal cost is the cost of producing one additional unit of a good or service, while average cost is the total cost of producing all units of a good or service divided by the number of units produced.
When average cost increases, the relationship between marginal cost and average cost changes. This can be explained as follows:
Impact of Increasing Average Cost on Marginal Cost
- When average cost increases, marginal cost is above average cost.
- This means that the cost of producing an additional unit of a good or service is higher than the average cost of producing all units of the good or service.
- This occurs because increasing production beyond a certain point leads to diminishing returns, which causes marginal cost to increase.
- As marginal cost increases, it pulls up the average cost of production.
Example
Suppose a company produces 1,000 units of a product at a total cost of $10,000, resulting in an average cost of $10 per unit. If the company decides to produce an additional unit, the marginal cost of production might be $15, due to the additional cost of labor, materials, etc. This means that the average cost of production for 1,001 units would be $10.05 ($10,015 total cost divided by 1,001 units), which is higher than the average cost of producing 1,000 units. As production increases further, the marginal cost will continue to rise, pulling up the average cost with it.
Conclusion
In summary, when average cost increases, marginal cost is above average cost. This occurs because increasing production beyond a certain point leads to diminishing returns, which causes marginal cost to increase. As a result, the relationship between marginal cost and average cost changes.
Marginal cost and average cost are two important concepts in economics. Marginal cost is the cost of producing one additional unit of a good or service, while average cost is the total cost of producing all units of a good or service divided by the number of units produced.
When average cost increases, the relationship between marginal cost and average cost changes. This can be explained as follows:
Impact of Increasing Average Cost on Marginal Cost
- When average cost increases, marginal cost is above average cost.
- This means that the cost of producing an additional unit of a good or service is higher than the average cost of producing all units of the good or service.
- This occurs because increasing production beyond a certain point leads to diminishing returns, which causes marginal cost to increase.
- As marginal cost increases, it pulls up the average cost of production.
Example
Suppose a company produces 1,000 units of a product at a total cost of $10,000, resulting in an average cost of $10 per unit. If the company decides to produce an additional unit, the marginal cost of production might be $15, due to the additional cost of labor, materials, etc. This means that the average cost of production for 1,001 units would be $10.05 ($10,015 total cost divided by 1,001 units), which is higher than the average cost of producing 1,000 units. As production increases further, the marginal cost will continue to rise, pulling up the average cost with it.
Conclusion
In summary, when average cost increases, marginal cost is above average cost. This occurs because increasing production beyond a certain point leads to diminishing returns, which causes marginal cost to increase. As a result, the relationship between marginal cost and average cost changes.
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What happens to marginal cost when average cost increases?a)Marginal cost is below average costb)Marginal cost is above average costc)Marginal cost is equal to average variable costd)Marginal cost is equal to average costCorrect answer is option 'B'. Can you explain this answer?
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