Question

When marginal costs are below average total costs, _______________.

• A. average fixed costs are rising
• B. average total costs are falling
• C. average total costs are rising
• D. average total costs are minimized

Answer 1

Answer: (B)

average total costs are falling

When the MC curve is lower than the AC curve, ie the MC ≤≤ AC the average cost will tend to fall as if you take a lower number and add it to the average and then take a new average, the new average has to be lower. At some point the MC will stop falling and begin rising to a point where it will meet the AC curve. Thus only when the MC ≥≥AC will the AC curve begin to rise as now a higher number is being added, and the new average must be higher. Thus the point that the MC meets the AC curve, has to be its minimum point.