Question

A firm is producing 20 units with an average total cost of $25 and marginal cost of $15. If it were to increase production to 21 units, which of the following must occur?

a. Marginal cost would decrease.
b. Marginal cost would increase.
c. Average total cost would decrease.
d. Average total cost would increase.

Answer 1

Answer:

c. Average total cost would decrease.

Explanation:

At the time of more units produced by a firm for a valid reason like efficient labor, good quality tools of production etc so in this the average fixed cost is inbuilt also it is allocated to the large number of output units plus the variable cost is also decline

Therefore the average total will always decline as the level of production increased because the average total cost involves both the cost i.e. average fixed cost and the average variable cost

Hence, option C is correct