Question

Explain the relationship between marginal cost and average cost with the help of a cost schedule.

Answer 1

Output (Units)	TFC (₹)	TVC (₹)	TC (₹)	AFC (₹)	AVC (₹)	ATC (₹)	MC (₹)
(1)	(2)	(3)	(4) (2 + 3)	(5) (2 ÷ 1)	(6) (3 ÷ 1)	(7) (4 ÷ 1) or (5 + 6)	(8) (TCn − TCn − 1)
0	120	0	120	−	−	−	−
1	120	40	160	120	40	160	40
2	120	76	196	60	38	98	36
3	120	102	222	40	34	74	26
4	120	132	252	30	33	63	30
5	120	170	290	24	34	58	38
6	120	234	354	20	39	59	64

The relationship between Marginal Cost (MC) and Average Cost (AC) can be explained using the given cost schedule:

1. When MC < AC, AC falls: Marginal cost is lower than average cost from output 1 to output 5 (for example, at output 3, MC = ₹ 26 and AC = ₹ 74). As a result, the average cost continues to decline since each extra unit lowers the overall cost compared to the average.
2. When MC > AC, AC rises: MC is ₹64 and AC is ₹59 at output 6. The average cost begins to rise since the marginal cost is now greater than the average cost.
3. When MC = AC, AC is minimum: At this stage, the AC drops to a minimum of ₹58 between outputs 5 and 6. The marginal cost starts to go above AC at this point.