Answer to Question #143881 in Finance for Mr. Dinesh Pal Singh

Question

16. Explain the relationship among the total, average and marginal functions in the most generalized way. Intuitively explain why any intersection of the average and marginal function will occur at a maximum or a minimum point on the average function.

Answer 1

Average Cost=$\frac{TC}{Q}$

Marginal Cost=$\frac{\Delta TC}{\Delta Q}$

Total Product is the summation of Marginal products at different input levels. When the Average Product is rising, the Marginal Product lies above the Average Product.

 

When the extra unit of output is cheaper than the average cost, then the Average Cost is pulled down. Similarly, when the Marginal Cost is greater than the Average Cost, the Average Cost is pulled up. The intersection between the Marginal Cost and Average Cost curves is also the minimum of the Average Cost curve. When the marginal output cost is equal to the average value of the output, then the Average Cost neither falls nor rises.