GK
BUSINESS ECONOMICS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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An increase in output
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A decrease in output
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Constant output
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None of the above
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Detailed explanation-1: -When the marginal cost is less than average cost, average cost falls with an increase in output. Thus as long as the MC curve lies below the ATC curve, the ATC curve will slope downwards.
Detailed explanation-2: -The marginal cost is the value of the additional cost that is added to the average thus if the marginal cost is higher than the average it tends to drag up the value of the average cost. Thus when the MC line is above the AC line, average cost is increasing.
Detailed explanation-3: -When the marginal cost is above the average cost, average cost increases. On the other hand, if the marginal cost is lower than the average cost then average cost also decreases. The reason for rapid rise in marginal cost is the law of diminishing returns.