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IAI Actuarial Core Principles · Business Economics · Production, costs, revenue and profit in price and output decisions

In the short run, a firm's marginal cost curve is observed to cut its average total cost curve. Where does the intersection occur, and why?

Marginal cost cuts average total cost at the minimum point of average total cost. Below that output marginal cost is under the average and pulls it down, and above it marginal cost exceeds the average and pulls it up.

  1. AAt the minimum of average total cost, because average falls when marginal is below it and rises when marginal is above itCorrect
  2. BAt the maximum of average total cost, because marginal cost then equals total cost
  3. CAt the minimum of marginal cost, because marginal cost is then lowest
  4. DAt the point where average fixed cost is zero
  5. At the point where total cost is minimised

Explanation

An average falls while the marginal value is below it and rises when the marginal value is above it. So marginal cost crosses average total cost at the minimum of the latter. The minimum of marginal cost is at a lower output, so that option is wrong.

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