A firm is currently producing 100 units with an average total cost of \$44 and a marginal cost of \$32. If it were to increase production to 101 units, which of the following must be true?

• A. Average total cost would decrease.
• B. Average total cost would increase.
• C. Marginal cost would decrease.
• D. Marginal cost would increase.

Answer: (A)

Verified step by step guidance

1. Understand the relationship between average total cost (ATC) and marginal cost (MC). If MC is less than ATC, producing an additional unit will decrease the ATC.
2. Identify the given values: the current ATC is \$44, and the MC for producing the 101st unit is \$32.
3. Compare the marginal cost of the additional unit (\$32) with the current average total cost (\$44). Since \$32 < \$44, the marginal cost is less than the average total cost.
4. Apply the concept that when MC is less than ATC, producing more units will bring the ATC down. This is because the additional cost of producing one more unit is less than the average cost of all units produced so far.
5. Conclude that increasing production from 100 to 101 units will result in a decrease in the average total cost, as the marginal cost of the additional unit is lower than the current average total cost.