CFA Practice Question

CFA Practice Question

Which of the following is always true of the relationship between average total costs and marginal costs?
A. Marginal costs are increasing when average total costs are higher than marginal costs.
B. Average total costs are increasing when marginal costs are increasing.
C. Average total costs are increasing when marginal costs are higher than average total costs.
Explanation: Assume the following costs: Fixed cost = 10. 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 $10 + ($10 + $12 + $14) which equals $46. Average total costs equals $46/3 or $15.333. If MC4 = $16 which is greater than average total cost the average total cost will rise. Thus, total cost becomes $46+$16 or $62 thus making average total cost equal $62/4 or $15.5. Thus, when marginal cost is greater than average total cost, the average total cost will rise.

User Contributed Comments 4

User Comment
Kuki good explanation..
LIEJON Isn t A usually also right? Can anyone give an example when a) is not right?
djread look at the graphical representation of the MC and ATC curves...makes it very easy to answer
ColonelCFA You absolutely have to look at a graphical representation of this to fully understand what it is trying to explain.
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