Question

Can the average cost rise when marginal cost is diminishing?

Answer 1

• AC rises when MC > AC: Even if marginal cost is falling, if it's still greater than average cost, the average cost will continue to rise.
• The trend of MC (rising or falling) doesn't matter: What matters is the value of MC relative to AC, not whether MC is increasing or decreasing.
• Example:
  Suppose:
  • Average Cost (AC) = ₹ 20
  • Marginal Cost (MC) = ₹ 30 → ₹ 28 → ₹ 25 (MC is falling)
    Since MC is still more than AC, AC will keep rising.
• Therefore, average cost can rise even when marginal cost is diminishing, as long as MC is greater than AC.