Assume a firm\'s short-run marginal cost is less than the short-run average cost

Question

Assume a firm's short-run marginal cost is less than the short-run average cost. If the firm increases its output level, will the firm's average cost increase or decrease? Explain relative to marginal cost. Assume a firm's short-run marginal cost is less than the short-run average cost. If the firm increases its output level, will the firm's average cost increase or decrease? Explain relative to marginal cost. Assume a firm's short-run marginal cost is less than the short-run average cost. If the firm increases its output level, will the firm's average cost increase or decrease? Explain relative to marginal cost.

Explanation / Answer

If the output level is increased, average cost would decrease.

It happens due to lower marginal cost. Since the marginal cost is low, the average of multiplying effect of additional units and its marginal cost would also become low. Average cost would continue lowering till it equals to marginal cost.

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