Question from Past Microeconomics Qualifying Exam[]

Spring 1999- Section I, Question two, George Mason University

True, False, Uncertain. Determine whether or not each of the following statements are true or false. Explain your reasoning briefly in a paragraph or two. (The explanation is often more important than the answer given). Include a carefully labeled diagram or game matrix if it helps to clarify your answer.

Average variable cost can never be rising if marginal cost is below average cost.


This depends on what type of average cost we are talking about, AVC or ATC. If MC <= AVC, then AVC cannot be rising. If MC > AVC, then AVC is rising. If MC <= ATC, then ATC cannot be rising. If MC > ATC, then ATC is rising.

The marginal cost (MC) curve intersects the average variable cost (AVC) curve at its minimum point. This means that when MC is less than AVC, the AVC must be decreasing with output; and when MC is greater than the AVC, the AVC must be increasing with output. This same principle also holds for average total cost (See Frank p317-320).


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