Question

If marginal cost equals average total cost ___________.

• A. average total cost is falling
• B. average total cost is rising
• C. average total cost is maximized
• D. average total cost is minimized

Answer 1

The correct option is D average total cost is minimized

$\Rightarrow$ Both AC and MC are derived from total cost (TC). AC refers to TC per unit of output and MC refers to addition to TC when one more unit of output is produced.

$\Rightarrow$ Both AC and MC curves are U-shaped due to the Law of Variable Proportions. The relationship between the two can be better illustrated through diagram.

$\Rightarrow$ When MC is equal to AC, i.e. when MC and AC curves intersect each other at point A, AC is constant and at its minimum point.

$\therefore$ If marginal cost equals average total cost average total cost is minimized.