- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 1. The Firm and Market Structures
- Subject 3. Marginal Revenue, Marginal Cost and Profit Maximization
CFA Practice Question
If a firm's average per-unit costs fall as it produces a larger output, then ______
A. marginal cost must be less than average total cost.
B. marginal cost must also decline as output expands.
C. average variable cost must also decline as output expands.
Explanation: Average total costs increase when marginal costs are greater than average total costs. Assume the following costs: Fixed cost = 100. The marginal cost of the first unit of output equals $10 (MC1), the marginal cost of the second unit of output equals $12 (MC2), MC3 = 14. Total costs for three units of output equals FC + VC, which here equals $100 + ($10 + $12 + $14), which equals $136. Average total costs equals $136/3 or $45.333. If MC4 = $16, which is smaller than the average total cost, the average total cost will decline. Thus, total cost becomes $136 + $16 = $152, making average total cost equal $152/4 or $38. Thus, when marginal cost is smaller than average total cost, average total cost will decline.
User Contributed Comments 2
| User | Comment |
|---|---|
| morek | Thank you for the breakdown. I did not understand but this helped clarify the correct thought process. |
| cleopatraliao | Economies of scale?MC<ATC :D |