If the marginal cost of producing the fifth unit of output is higher than the marginal cost of producing the fourth unit of output, then at five units of output, average total cost must be rising.

a. True

b. False

Answer: a. True

Explanation:

Marginal Cost as well known is the cost of producing an extra unit of a good. Average Cost on the other hand is the cost of producing all the goods divided by the number of units that are produced.

It therefore stands to reason that if goods are getting more expensive to produce, the Average Cost will rise.

For example, take 2 scenarios.

Scenario 1.

Cost of producing units 1 to 5 is $2 each.

Average Cost = (2 + 2 + 2 + 2 + 2) / 5

= 10/5

Average Cost = $2

Scenario 2

Cost of Producing Units 1 to 5 are;

Unit 1 - $2

Unit 2 - $2

Unit 3 - $2

Unit 4 - $2

Unit 5 - $4

Average cost at unit 5 = (2 + 2 + 2 + 2 + 4) / 5

= 12/5

= $2.40

Average Cost has increased by $0.40