Which of the following statements about cost curves in the context of cost-minimizing combinations of labor and capital is correct?

• A. The average variable cost curve always lies above the average total cost curve.
• B. The marginal cost curve intersects the average total cost curve at its minimum point.
• C. The marginal cost curve is always downward sloping.
• D. The average fixed cost curve increases as output increases.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the definitions of the cost curves involved: Average Total Cost (ATC), Average Variable Cost (AVC), Average Fixed Cost (AFC), and Marginal Cost (MC). ATC is the total cost per unit of output, AVC is the variable cost per unit, AFC is the fixed cost per unit, and MC is the additional cost of producing one more unit.
2. Step 2: Recall the relationship between these curves. Since total cost = fixed cost + variable cost, the average total cost curve is the sum of the average fixed cost curve and the average variable cost curve, so ATC = AFC + AVC. Because AFC is always positive, AVC always lies below ATC, not above.
3. Step 3: Consider the behavior of the marginal cost curve relative to the average total cost curve. The marginal cost curve intersects the average total cost curve at its minimum point. This is because when MC is less than ATC, ATC is decreasing, and when MC is greater than ATC, ATC is increasing.
4. Step 4: Analyze the slope of the marginal cost curve. The MC curve is typically U-shaped due to diminishing marginal returns, so it is not always downward sloping; it first decreases and then increases.
5. Step 5: Examine the average fixed cost curve. Since fixed costs are constant, spreading them over more units causes AFC to decrease as output increases, so AFC does not increase with output.