Question from Past Microeconomics Qualifying ExamEdit
Fall 1999- Section I, Question five, George Mason University
True, False, Uncertain. Determine whether or not each of the following statements are true or false. Explain your reasoning briefly in a paragraph or two. (The explanation is often more important than the answer given). Include a carefully labeled diagram or game matrix if it helps to clarify your answer.
Average total cost can never be falling if marginal cost is above average total cost.
True, Simply stated, marginal cost (MC) intersects average total cost (ATC) at its lowest point;; therefore, if MC is above ATC, ATC is rising and if MC is below ATC, ATC is falling. Another way to think about it - MC measures the change in the TVC given a change in output (MC = TVC/Q) while ATC measures the TC divided by the level of output [ATC = (TVC + TFC)/Q]. For ATC to decrease, the addition (MC) to the TC must be less than the previous ATC; while for ATC to increase, the addition (MC) to TC must be greater than the previous ATC. Thus ATC cannot be falling when MC > ATC.