In the short run, if marginal cost exceeds average total cost, what happens to average total cost as output increases?

• A. Average total cost decreases
• B. Average total cost remains constant
• C. Average total cost becomes zero
• D. Average total cost increases

Answer: (D)

Verified step by step guidance

1. Recall the relationship between Marginal Cost (MC) and Average Total Cost (ATC): MC represents the cost of producing one additional unit, while ATC is the total cost per unit of output.
2. Understand that when MC is greater than ATC, producing an additional unit costs more than the average cost of previous units.
3. Because the additional unit is more expensive than the average, it pulls the average cost upward, causing ATC to increase as output increases.
4. This is analogous to how adding a number greater than the current average increases the average value.
5. Therefore, when MC > ATC, the average total cost rises with increased output.