Question

When MC is above AC, the average cost curve:

• A. Is rising
• B. Is falling
• C. Remains constant
• D. Runs parallel to Fixed cost curve

Hint:

Exam Tip: Remember the following rule:
MC curve intersects the AC curve at the latter's minimum point.
If MC \(>\) AC, AC is rising.
If MC \(<\) AC, AC is falling.
This relationship also holds for Marginal and Average Variable Cost (AVC).

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
This question tests the relationship between Marginal Cost (MC) and Average Cost (AC) curves. This is a fundamental concept in cost analysis.

Step 2: The Relationship between MC and AC:
The relationship between MC and AC is:
• When MC is below AC, the AC is falling. This is because the addition of a unit with a cost lower than the average pulls the average down.
• When MC is above AC, the AC is rising. This is because the addition of a unit with a cost higher than the average pulls the average up.
• When MC is equal to AC, the AC is at its minimum point (the MC curve intersects the AC curve at its lowest point).

Step 3: Analyzing the Statement:
The question states: "When MC is above AC."
According to the relationship described, if MC is above AC, the AC curve is rising.

Step 4: Final Answer:
When MC is above AC, the average cost curve is rising. Therefore, option (A) is correct.