A watch manufacturer finds that at 1,000 units of output, its marginal costs are below average total costs

Economics Dec 07, 2020

A watch manufacturer finds that at 1,000 units of output, its marginal costs are below average total costs. If it produces an additional watch, will its average total costs rise, fall, or stay the same?

Expert Solution

Average total cost will fall.

If marginal cost is below the average total cost, then the cost of producing an additional unit is lower than the average cost of all units previously produced. Now the new average total cost, after adding the last unit produced, must be lower than before.

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