Question

Which of the following statements about the relationship between marginal cost and average cost is correct?

• A. When MC is falling, AC is falling
• B. AC equals MC at MC's lowest point
• C. When MC exceeds AC, AC must be rising
• D. When AC exceeds MC, MC must be rising

Answer 1

The correct option is C When MC exceeds AC, AC must be rising

When the MC curve is lower than the AC curve, i.e., 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 at the point where the MC meets the AC curve, AC has to be at its minimum point.