Question

Which of the following statements about a firm’s cost structure are correct?

(a) Average cost measures the firm’s cost of producing one additional unit.

(b) Both average costs and average variable costs are always upward sloping.

(c) If marginal cost is above average cost, then average cost is increasing

Answer 1

c) If marginal cost is above average cost, then average cost is increasing.

It is the Marginal cost which is the cost of producing one additional unit and not Average cost(Therefore a) is wrong).

And average costs is the cost of producing each unit on average i.e. total costs/quantity. (Average variable costs is Total variable cost/Quantity) and they can be initially downward sloping and then upward sloping (So they are not always upward sloping) so b) is also wrong.

Now, if the Marginal cost i.e. the cost of producing one additional unit is higher than the average cost, it means it this unit will cost more to make than the other units on average, so When it gets produced, it will increase the average cost of all the units (As an example if the average of ten numbers is 5, and you add a eleventh number greater than 5, you new average of the eleven numbers will be greater than 5 too)

Hope it helps. Do ask for any clarifications if required.