In a short-run production process, the marginal cost is rising and the average variable cost is falling as output is increased. Thus,
A) average fixed cost is constant.
B) marginal cost is above average variable cost.
C) marginal cost is below average fixed cost.
D) marginal cost is below average variable cost.

Question

Quizplus · Accepted Answer

The fact that the marginal cost is rising indicates that the cost of producing an additional unit is increasing. However, since the average variable cost is falling, this suggests that the cost per unit of producing a certain level of output is decreasing. This implies that the variable costs (e.g. labor, materials) are being spread out over a larger number of units, resulting in a lower average cost per unit. Therefore, the marginal cost must be below the average variable cost, as long as the average variable cost is also falling. It is not necessarily true that the average fixed cost is constant, and there is no information in the statement about the relationship between marginal cost and average fixed cost.

In a Short-Run Production Process, the Marginal Cost Is Rising