Home › CA Foundation › Business Economics › Theory of Cost › Which of the following statements about the rela…
Which of the following statements about the relationship between marginal cost (MC) and average total cost (ATC) is correct?
AWhen MC is below ATC, the ATC is rising
BMC always equals ATC at every output level
CWhen MC is above ATC, the ATC is falling
DMC cuts ATC at the minimum point of ATC
Answer & Solution
Correct answer: D. MC cuts ATC at the minimum point of ATC
1. By the marginal-average rule, MC below ATC pulls ATC down, and MC above ATC pulls ATC up.
2. ATC therefore reaches its minimum exactly where MC crosses it.
3. So the MC curve cuts the ATC curve at the minimum point of ATC.
4. (A) reverses the rule (MC below ATC means ATC falling), (C) also reverses it, and (B) is false except at that single crossing point. Hence option B.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 3 Unit II "Theory of Cost", p.7–8_
Related questions
A firm's average variable cost falls as output rises from zero toward normal capacity but In the short run, as the output of a firm steadily increases, its average fixed cost (AFC)Which one of the following is an example of an implicit cost?Which one of the following is an example of an explicit cost?With which one of the following costs is the concept of marginal cost most closely relatedEmpirical studies of modern firms suggest the long-run average cost curve is often 'L-shapThe 'U' shape of the long-run average cost curve, unlike that of the short-run average cosThe LAC curve is tangent to the minimum point of a short-run average cost curve at only on