CFA Practice Question

There are 539 practice questions for this study session.

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.