Suppose that your firm's marginal cost of producing a pencil is 5 cents and the average cost of producing a pencil is 7 cents. If your firm is interested in minimizing average total costs, what should your firm do?

Question

Quizplus · Accepted Answer

When marginal cost is below average cost, increasing production will lower the average cost until it equals the marginal cost, thus minimizing average total costs.

Suppose That Your Firm's Marginal Cost of Producing a Pencil