When Marginal Cost (MC) is greater than Average Cost (AC) then:(a) AC must be rising;(b) AC must be falling;(c) AC is constant;(d) None of the above as MC and AC are un-connected.
Question
When Marginal Cost (MC) is greater than Average Cost (AC) then:(a) AC must be rising;(b) AC must be falling;(c) AC is constant;(d) None of the above as MC and AC are un-connected.
Solution
The correct answer is (a) AC must be rising.
Here's the step by step explanation:
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Marginal Cost (MC) is the cost of producing one additional unit of a good.
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Average Cost (AC) is the total cost divided by the number of goods produced.
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When MC is greater than AC, it means the cost of producing the next good is higher than the average cost of producing all the previous goods.
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This will pull the average cost up, because the average is being influenced by a higher marginal cost.
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Therefore, when MC is greater than AC, the AC must be rising.
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