CA Foundation · Business Economics · Theory of Production and Cost
In the short run, a firm's average variable cost (AVC) is ₹40 at 100 units and its marginal cost (MC) at that output is ₹40. Assuming AVC is U-shaped, what can be concluded about this output level?
AVC is at its minimum at this output. MC below AVC pulls it down and MC above AVC pushes it up, so when MC equals AVC the curve is neither falling nor rising. MC therefore cuts the U-shaped AVC curve exactly at its lowest point.
- AAVC is at its minimum pointCorrect
- BAVC is rising because MC equals AVC
- CAVC is falling because MC equals AVC
- DAverage fixed cost is at its minimum
Explanation
MC pulls AVC down when MC is below AVC, and pushes it up when MC is above AVC. When MC equals AVC, AVC is neither falling nor rising, so it is at its minimum. Options B and C wrongly infer a direction of movement from equality. Average fixed cost keeps falling as output rises, so it has no minimum here.
Did you get it right without looking?
One question tells you little. A timed set on Theory of Production and Cost shows your real accuracy, how long you take and where you lose marks.
More Theory of Production and Cost questions
- A firm doubles all of its inputs and finds that its output rises by less than double. Which of the following does this situation illustrate?
- A manufacturing firm in Delhi observes that when it increases labour from 4 workers to 5 workers, total output rises from 80 units to 95 uni…
- When average product is at its maximum point on a graph, which of the following must be true about marginal product?
- In the short run, which of the following is an example of a fixed cost for a bakery owned by Imran in Lucknow?
- A bakery in Pune employs labour with the following total product (TP) schedule: 1 worker = 10 units, 2 workers = 24 units, 3 workers = 36 un…
- A firm's marginal cost curve is rising and cuts the average variable cost (AVC) curve. Which statement about the point of intersection is co…