150. If marginal cost is greater than average total cost, then average total cost:A.is minimized.B.is falling.C.will not change.D.is rising. Show If marginal cost exceeds average total cost, then average total cost must be increasing sincethe cost of the last unit exceeds the average cost of the previous units.AACSB: AnalyticBLOOM'S TAXONOMY: ComprehensionDifficulty: MediumLearning Objective: 12-6Topic: Cost Curves12-114 Chapter 12 - Production and Cost Analysis I151. If marginal cost exceeds average total cost, then: Average variable cost increases because when marginal cost exceeds average total cost,marginal costs are rising so that each additional unit of output must be produced fromincreasing amounts of variable inputs.AACSB: Reflective ThinkingBLOOM'S TAXONOMY: ComprehensionDifficulty: HardLearning Objective: 12-6Topic: Cost Curves152. The marginal cost curve intersects the average total cost curve when average variablecosts are: This must be true because the average variable cost curve reaches a minimum before theaverage total cost curve (MC intersects both ATC and AVC at their minimum points). At anyoutput above the level at which average variable cost reaches a minimum, average variablecost is rising.AACSB: AnalyticBLOOM'S TAXONOMY: ComprehensionDifficulty: MediumLearning Objective: 12-6Topic: Cost Curves12-115 Chapter 12 - Production and Cost Analysis I153. If marginal cost equals average total cost, then: If marginal cost exceeds average total cost, then average total cost will increase. If marginalcost is less than average total cost, average total cost will decrease.AACSB: Reflective ThinkingBLOOM'S TAXONOMY: ComprehensionDifficulty: MediumLearning Objective: 12-6Topic: Cost Curves154. Whenever the marginal cost curve lies below the average total cost curve the:A.average variable cost is increasing.B.average variable cost is decreasing.C.average total cost is increasing.D.average total cost is decreasing. Average variable cost can be either increasing or decreasing when marginal cost is less thanaverage total cost, but average total cost must decline if the cost of producing an additionalunit of output is less than the average cost of producing previous units.AACSB: Reflective ThinkingBLOOM'S TAXONOMY: ComprehensionDifficulty: HardLearning Objective: 12-6Topic: Cost Curves12-116 Chapter 12 - Production and Cost Analysis I Solution: The marginal cost (MC) curve is the u-shaped curve that is the locus of the cost of creating an additional unit. The marginal product (MP) curve is the inverted u-shaped curve which is the locus of the additional output generated when additional or extra input is added. The MC and MP are inversely related, that is as one rises the other falls. In other words, as the cost of creating an additional unit rises, the extra output added by the additional input falls. So, the correct choice is option c. Option a is not correct as MC rises, it adds to the variable cost which has an ambiguous result on the average variable cost. Option b is not correct as the average fixed cost (AFC) is not rising, it is falling with increasing output. Option d is not correct as MC and MP are inversely related, so as MC rises MP falls. Costs of Production in a Perfectly Competitive Market
The following graph shows the cost curves for a firm in a perfectly competitive market. Use the sliders to adjust the firm's productive capacity, fixed costs and variable costs, and see how the cost curves change in response. Also, try changing the market price of the product to create break-even, profit, and loss situations.
When marginal cost is greater than average total cost average total cost is rising?When marginal cost is greater than average variable or average total cost, AVC or ATC must be increasing. Therefore, the only possible point at which marginal cost equals average variable or average total cost is the minimum point.
When marginal cost is greater than average average cost?The marginal cost is the value of the additional cost that is added to the average thus if the marginal cost is higher than the average it tends to drag up the value of the average cost. Thus when the MC line is above the AC line, average cost is increasing.
When marginal cost is less than average total cost average total cost is rising?Whenever marginal cost is less than average total cost, average total cost is falling. Whenever marginal cost is greater than average total cost, average total cost is rising.
What happens when average total cost is rising?When average cost is declining as output increases, marginal cost is less than average cost. When average cost is rising, marginal cost is greater than average cost. When average cost is neither rising nor falling (at a minimum or maximum), marginal cost equals average cost.
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