Answer to Question #321130 in Microeconomics for Samrs

Question

Suppose that the marginal cost of a firm for a given level of output is Birr 30 and its AVC is Birr 40. In which stage of production is the firm operating?

Answer 1

If the marginal cost is Birr 30 and AVC is Birr 40, the marginal cost is lower than the AVC. Marginal cost is the expense incurred to produce an extra output unit, while the AVC is labor expense per output unit. When the marginal cost is below the AVC, it pulls the AVC down in a standard case. In this case, the firm will be operating in a production stage called the trough. The firm will have experienced a recession to get to this stage. When shown in a curve, the Marginal cost and the AVC intersect at the lowest point, which is the trough.