Question

Explain whether marginal cost can increase when the average cost decreases.

Answer 1

• Yes, marginal cost (MC) can increase even when average cost (AC) is decreasing.
• This happens because marginal cost refers to the expense of producing one extra unit, while average cost is the total cost divided by the total number of units produced.
• In the early stages of production, average cost decreases as fixed costs are distributed over a larger number of units.
• Even if the marginal cost begins to climb, it may still pull the average cost down, though at a slower pace, until it eventually causes the average cost to rise.