The efficient output level occurs when:
A marginal cost is minimized.
B average variable cost is minimized.
C average total cost is minimized.
D average fixed cost is minimized
The correct answer and explanation is:
The correct answer is C: average total cost is minimized.
Explanation:
In economics, the efficient output level is the level of production where average total cost (ATC) is minimized. Average total cost represents the total cost per unit of output, which includes both fixed and variable costs. When a firm produces at the level where its ATC is at its lowest, it is operating most efficiently, meaning it is not wasting resources in production.
To understand this, let’s break down the other options:
- A. Marginal cost is minimized: Marginal cost (MC) refers to the additional cost of producing one more unit of output. While it is important to track the marginal cost in decision-making, minimizing it does not necessarily correspond to the most efficient output level. In fact, marginal cost and average total cost interact in a way that marginal cost intersects with average total cost at the point where ATC is minimized, but minimizing MC alone does not guarantee efficiency.
- B. Average variable cost is minimized: Average variable cost (AVC) represents the variable costs per unit of output. Minimizing AVC is important for understanding the efficiency of variable costs, but the overall efficiency of a firm depends on both fixed and variable costs, which are captured by the average total cost.
- D. Average fixed cost is minimized: Average fixed cost (AFC) decreases as output increases because fixed costs are spread over a larger number of units. However, minimizing AFC alone does not indicate the most efficient production level because it ignores variable costs, which are a crucial part of overall cost efficiency.
Therefore, C is the best answer because the firm’s overall cost efficiency is determined by the average total cost, which includes both fixed and variable costs. The point where ATC is minimized is considered the efficient scale of production for a firm.