Average total cost decreases with an increase in output because ________.
A) total variable cost decreases with an increase in output
B) average fixed cost decreases with an increase in output
C) the marginal cost of production increases with an increase in output
D) diminishing marginal returns set in after a particular level of production

Question

Quizplus · Accepted Answer

Average total cost is the sum of average fixed cost and average variable cost. As output increases, fixed costs are spread over a larger number of units, leading to a decrease in average fixed cost. This brings down the average total cost. Average variable cost, on the other hand, may increase due to diminishing marginal returns, but this increase is offset by the decrease in average fixed cost, leading to a net decrease in average total cost. Marginal cost may or may not increase with an increase in output, but it is not the main reason for the decrease in average total cost.

Average Total Cost Decreases with an Increase in Output Because