Why does the average cost decline, when marginal cost increases in the diagram?

Accounting Dec 08, 2020

Expert Solution

Average cost is the sum of average fixed cost and average variable cost, i.e.,

average cost = average fixed cost + average variable cost

When marginal cost increases, average variable cost also increases with output. But average fixed cost will always decline with output. Therefore, if the decline in the average fixed cost is stronger than the rise in average variable cost, then average cost will decline, when marginal cost increases.

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