Average cost against marginal cost

The average and marginal rule works like grades. If your next test score (the marginal) is above your current average, the average goes up. If it is below, the average goes down, even when your new scores are improving.

Apply that to costs. When marginal cost is above average variable cost, each new unit costs more than the average so far, so AVC must rise. That is choice D, and it holds every time.

The other statements tie the average to whether marginal cost is rising, which is the wrong test. Marginal cost can be rising while still below the average, and then the average is still falling. That is the stretch of output just past the bottom of the MC curve.

Each choice

• A. Marginal cost starts rising well before it crosses ATC. Until it crosses, MC is below ATC and ATC is still falling. What matters is whether MC is above or below the average, not its direction.
• B. When MC is below AVC, it may be falling or rising. Right after its lowest point MC rises while still below AVC, so this is not always true.
• C. This has the same flaw as A, applied to AVC. Rising MC that is still below AVC pulls AVC down, not up.
• D (correct). Any time marginal cost is above average variable cost, the new unit pulls the average up.
• E. With constant MC and no fixed cost, ATC would be constant. But a firm with fixed cost spreads it over more units as output grows, so ATC keeps falling even when MC is flat.