Friday, August 12, 2011

What is the FALLACY in this statement: Average cost (AC) is rising whenever marginal cost(MC) is rising.?

AC includes fixed costs, where Marginal costs dont, so for instance if your fixed costs are 100 dollars and the marginal cost is lets say 30 dollars. So for 1 good, its costs you 130 dollars. your AC is 130. Now lets say to produce 1 more of the same good, it costs 50 dollars. Your MC has gone up by 20$, but now you can get the output of 2 goods for $180. So your average cost is $90. Here, your MC has gone up $30, but your AC has gone down $40.

No comments:

Post a Comment