Question

Explain the relationship between marginal cost and average variable cost.

Answer 1

The relationship between average variable cost (AVC) and marginal cost (MC) is as follows:
(i) When MC is less than AVC, AVC falls with increase in the output.
(ii) When MC is equal to AVC i.e. when MC and AVC curves intersect each other at point A, AVC is constant and at its maximum point.



(iii) When MC is more than AVC, AVC rises with increase in output.
(iv) Thereafter, AVC and MC rise but MC increases at a faster rate as compared to AVC. As a result, MC curve is steeper as compared to AVC curve.