Sure, let’s break down the concepts to understand the solution:
1. Average Variable Cost (AVC): AVC is calculated by dividing total variable costs by the quantity of output produced. It shows the variable cost per unit of output.
2. Marginal Cost (MC): MC is the additional cost incurred by producing one more unit of output.
When analyzing how these costs behave as output increases, consider the following:
- If AVC is decreasing, it indicates that the variable cost per unit of output is getting lower as more units are produced. This typically suggests that the firm is experiencing increasing marginal returns, where initially, producing additional units becomes more efficient.
- For the AVC to decrease, the cost of producing the next unit (MC) has to be less than the current AVC. If the MC were higher than the AVC, then the AVC would increase because additional units would cost more, increasing the overall average.
By understanding this relationship, we can conclude that:
If AVC is decreasing as output increases, then marginal cost must be less than average variable cost.
Therefore, the correct answer is:
C. Less than average variable cost.
