Chapter 11R, Problem 5MCQ

To determine

The correct option for given situation where output level is decided for minimizing average total cost.

Answer to Problem 5MCQ

Option b is correct answer.

Explanation of Solution

Explanation for correct option:

b.

As shown below in the graph, marginal cost is minimum when it intersects the average total cost curve. Whenever marginal cost is below the average total cost then production of additional unit will reduced the total average cost up to an extent. It will be minimum when MC curve intersects ATC curve after which it starts increasing. Therefore, option b is correct.

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Explanation for incorrect options:

a.

ATC is less when marginal cost for the product is below the average total cost (ATC). But when MC curve intersects the ATC curve, ATC is lowest. Therefore, option a is incorrect.

c.

ATC is not minimum if marginal cost curve cuts the average fixed cost curve. This is because marginal cost affects average total cost. For instance, if one additional unit is produced at higher cost than the average total cost will be increased. Total cost includes both fixed and variable cost if only fixed cost is lowered then it is not necessary that the total cost will also decrease. Therefore, option c is incorrect.

d.

Similarly, variable cost if reduced does not ensure that average total cost will be minimum. If MC curve intersects the average variable cost curve then it will be the minimum average variable cost but not the average total cost. Therefore, option d is incorrect.

e.

In perfect competition, firms are the price takers where ATC is minimum to the point at which MC curve cuts the MR curve. For all type of firms, the total cost can be minimum if marginal cost for additional unit is less. Therefore, option e is incorrect.

Economics Concept Introduction

Average total cost: Average total cost of production per unit is comprised of two cost components that are average fixed cost and average variable cost. In short-run, fixed cost of the production remains similar.