Suppose marginal costs are below average total costs at 500 units of output for a manufacturer....

Suppose marginal costs are below average total costs at 500 units of output for a manufacturer. If the manufacturer produces an additional unit, will its average total costs rise, fall, or stay the same? Explain.

Expert Solution

The average total cost (ATC) is total cost divided by output and it is U shaped. The shape of the ATC curve is determined by the shape of Averag Fixed Cost (AFC) and Average Variable Cost (AVC). Marginal cost (MC) is the cost incurred for producing an extra unit of output. The MC and AVC are also U shaped. The MC curve passes through the minimum point of AVC and ATC. Thus, when MC is below ATC, ATC is falling, when MC passes through the minimum point of ATC, ATC is same and when MC is above ATC, ATC is rising.

Now it is said that at 500 units of output, the MC is below ATC which means that the ATC is falling. Now if the manufacture produces an additional unit and still the MC lies below the ATC curve, then ATC will fall. And if for the additional unit, MC passes through the minimum point of ATC curve, then ATC will remain the same. And again if for the additional unit, MC lies above the ATC curve, then ATC will increase. Thus the change in ATC is uncertain and depends on the change of MC.

Rahul Sunny answered 2 years ago

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