### CFA Practice Question

There are 539 practice questions for this study session.

### CFA Practice Question

Which of the following statements best explains why the average total cost of a firm is U-shaped?
A. Marginal cost is high for low output levels and average fixed cost is high for high output levels.
B. Average fixed cost is high for low output levels and marginal cost is high for high output levels.
C. Marginal cost is low for low output levels and average fixed cost is low for high output levels.
Explanation: ATC = AFC + AVC = (TFC + TVC)/Q. First we focus on average fixed costs, TFC/Q. Since the cost is fixed, the smaller Q is the larger ATC will be. However, as higher output levels are reached, there is a point where the incremental change in total cost for each incremental change of quantity will start to increase. That is, MC = DTC / Dq will start to get bigger, to the point where MC > ATC in such a way that ATC gets bigger. So on either extreme (low Q, high Q), ATC will be high.