CMA Foundation · Fundamentals of Business Economics and Management · Cost of Production
A manufacturer in Coimbatore finds that at its present output the average cost is falling as output rises. Which statement about marginal cost (MC) at this output must be true?
Marginal cost must be below average cost when average cost is falling. A new unit costing less than the existing average pulls the average down. If marginal cost equalled average cost, the average would be at its minimum, and if it were higher, the average would rise.
- AMC is equal to average cost
- BMC is below average costCorrect
- CMC is above average cost
- DMC is zero
Explanation
Average cost falls only when the extra unit costs less than the current average, pulling the average down. So MC lies below AC. If MC were equal, AC would be at its minimum; if above, AC would rise.
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