Question

Which of the following options correctly defines the geometric relationship between the Short-run Marginal Cost (SMC) curve and the Average Variable Cost (AVC) curve?

• A. \( \text{The SMC curve intersects the AVC curve from below at its lowest (minimum) point.} \)
• B. \( \text{The SMC curve remains completely parallel and sits strictly above the AVC curve at all output levels.} \)
• C. \( \text{The SMC curve cuts the AVC curve at its highest maximum point during early production phases.} \)
• D. \( \text{The SMC curve always intersects the AVC curve at the exact same output level where Average Fixed Cost reaches zero.} \)

Hint:

The marginal cost curve always passes through the lowest points of both the Average Variable Cost (AVC) and the total Average Cost (AC) curves.

Answer 1

The Correct Option is A

Concept: The relationship between marginal and average cost values follows basic mathematical averaging rules:

• When marginal cost is less than average cost (\( \text{SMC} < \text{AVC} \)), the average value must fall.
• When marginal cost exceeds average cost (\( \text{SMC} > \text{AVC} \)), the average value must rise.
• Consequently, when average cost is neither falling nor rising (at its flat minimum point), the marginal value must equal the average value (\( \text{SMC} = \text{AVC} \)).

Step 1: Trace the early phases of the cost curve curves. During early stages of production, increasing returns to variable inputs cause the marginal cost of additional units to drop quickly, dragging the average variable cost down behind it. In this phase, the SMC curve sits fully below the AVC curve.

Step 2: Locate the exact intersection point under diminishing returns. Eventually, diminishing marginal returns set in, causing the SMC curve to turn upward and rise rapidly. As it climbs, it passes through the absolute lowest (minimum) point of the U-shaped AVC curve. Past this intersection point, each additional unit costs more than the current average, pulling the AVC curve upward.