When average cost is falling as output rises, the relationship between marginal cost (MC) and average cost (AC) must be:

1. The marginal pulls the average: a marginal value below the average drags the average down. 2. Therefore when AC is falling, MC must lie below AC. 3. This is the standard marginal-average rule applied to costs. 4. MC > AC (A) would raise the average, MC = AC (C) holds only at AC's minimum, and MC = 0 (D) is unrelated. Hence MC is less than AC. _Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 3 Unit II "Theory of Cost", p.7_