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CA Foundation · Business Economics · Theory of Production and Cost

A firm's average total cost is ₹50 at 80 units. Its marginal cost of producing the 81st unit is ₹58. Which outcome follows for the 81st unit, and what is the new total cost?

Average total cost rises and the new total cost is ₹4,058. Total cost at 80 units is 50 times 80, or ₹4,000, and the 81st unit adds ₹58. Because marginal cost exceeds average cost, the average is pulled upward to about ₹50.10.

  1. AATC falls; total cost is ₹4,058
  2. BATC rises; total cost is ₹4,058Correct
  3. CATC rises; total cost is ₹4,000
  4. DATC is unchanged; total cost is ₹4,058

Explanation

Total cost at 80 units = 50 x 80 = ₹4,000. Adding MC of ₹58 gives ₹4,058 at 81 units. New ATC = 4,058/81 = about ₹50.10, which is higher than ₹50, because MC exceeds ATC and pulls the average up. A falling ATC would need MC below ATC.

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