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When average cost is falling as output rises, the relationship between marginal cost (MC) and average cost (AC) must be:
AMC is greater than AC
BMC is less than AC
CMC is equal to AC
DMC is equal to zero
Answer & Solution
Correct answer: B. MC is less than AC
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_
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