When the marginal cost of producing an output exceeds its average variable cost but is less than its average total cost, _. A. average fixed cost is increasing B. both average variable cost and average total cost are increasing C. total variable cost is at its maximum value D. average variable cost is increasing while average total cost is decreasing
The correct answer and explanation is:
The correct answer is B. both average variable cost and average total cost are increasing.
Explanation:
In economics, marginal cost (MC), average variable cost (AVC), and average total cost (ATC) are important concepts for understanding how a firm’s cost structure behaves as production increases.
The relationship between these cost measures follows a specific pattern during the production process. When marginal cost exceeds average variable cost, it suggests that the firm’s variable costs are rising at a faster rate. Since the marginal cost curve intersects both the average variable cost curve and the average total cost curve at their minimum points, when the marginal cost is higher than the average variable cost, it indicates that the AVC is on the upward slope, meaning it is increasing.
Similarly, when the marginal cost is between the average variable cost and the average total cost, it implies that the average total cost is also increasing. This is because the average total cost is composed of both average variable cost and average fixed cost. When AVC rises and contributes to higher total costs, ATC will follow suit and also rise, but at a slower pace compared to AVC.
Thus, when marginal cost is greater than average variable cost but less than average total cost, both AVC and ATC are increasing, as the firm is experiencing diminishing returns to scale. As output increases, the firm’s costs continue to increase, but the rate at which they increase may start to slow down once the marginal cost exceeds the average variable cost.
This scenario highlights the impact of rising production costs on a firm’s pricing and output decisions, and how cost curves interact at different stages of production.