A firm is producing 20 units with an average total cost of ...

A firm is producing 20 units with an average total cost of $\$ 25$ and a marginal cost of $\$ 15 .$ If it were to increase production to 21 units, which of the following must occur? a. Marginal cost would decrease. b. Marginal cost would increase. c. Average total cost would decrease. d. Average total cost would increase.

A firm is producing 20 units with an average total
cost of $\$ 25$ and a marginal cost of $\$ 15 .$ If it were to
increase production to 21 units, which of the following must occur?
a. Marginal cost would decrease.
b. Marginal cost would increase.
c. Average total cost would decrease.
d. Average total cost would increase.

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Key Concepts

Marginal Cost

Marginal cost is the additional cost incurred when producing one extra unit of output. It plays a crucial role in decision-making because it indicates how costs change with production volume and is essential for determining the impact of producing an additional unit.

Average Total Cost

Average total cost is calculated by dividing total costs by the number of units produced. It represents the cost per unit of output and is used to assess overall production efficiency and cost management.

Relationship Between Marginal Cost and Average Total Cost

The relationship between marginal cost and average total cost is fundamental in cost analysis. When the marginal cost of an additional unit is lower than the average total cost, producing one more unit will lower the average total cost. Conversely, if the marginal cost exceeds the average total cost, the ATC will increase. This relationship indicates whether increasing production leads to economies or diseconomies of scale.

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