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Question

What is the relation between marginal cost and average variable cost when marginal cost is rising and average variable cost is falling?


Solution

When MC is more than AC, AC rises with increase in output.
Thereafter, both AC and MC rise, but MC increases at a faster rate as compared to AC. As a result, MC curve is steeper as compared to AC curve.When MC curve lies above AC curve, it pulls the latter upwards. 
In certain cases, if MC curve is below the AC curve, AC will fall even if MC is rising.

Economics

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