Suppose there are fixed costs and marginal costs that are constant. Then we know that
A) average total costs are also constant.
B) average variable costs decrease continuously as output increases, and lie above the marginal cost curve.
C) average total costs decrease continuously as output increases, and lie above the average variable cost curve, which also is decreasing continuously.
D) average total costs decrease continuously as output increases, and lie above the average variable cost curve, which is constant.

Question

Quizplus · Accepted Answer

When there are fixed costs and constant marginal costs, average total costs decrease as output increases because the fixed costs are spread over more units. However, average variable costs remain constant (equal to the marginal cost) because they do not include fixed costs and the marginal costs are constant.

Suppose There Are Fixed Costs and Marginal Costs That Are