In cost analysis, if Average Total Cost (ATC) is declining as output increases, what must be true about marginal cost (MC) at that range of output?

Introduction / Context:
The relationship between marginal cost and average total cost is a standard concept in microeconomics and managerial economics. Average total cost tells you the cost per unit at a given output level, while marginal cost tells you the cost of producing one more unit. Understanding how these curves interact is important for analysing cost structures and making production decisions. This question asks you to state what must be true about marginal cost when average total cost is declining.

Given Data / Assumptions:

• Average Total Cost is declining as output increases in the range considered.
• We assume a typical U shaped ATC curve and standard cost conditions.
• Marginal cost is defined as the change in total cost due to an additional unit of output.

Concept / Approach:
There is a well known mathematical relationship between average and marginal values. When the marginal value is below the average, the average decreases as more observations are added. When the marginal value is above the average, the average increases. Applied to costs, if MC is less than ATC, then ATC is pulled downward and declines; if MC is greater than ATC, ATC is pulled upward and rises. At the minimum point of ATC, marginal cost equals average total cost.

Step-by-Step Solution:
Step 1: Translate the question into the generic relationship: if ATC is declining, what does that imply about MC relative to ATC.Step 2: Recall that whenever MC lies below ATC, each extra unit costs less than the current average, so the average falls.Step 3: Therefore, in the range where ATC is declining, MC must be less than ATC.Step 4: Option A states that marginal cost is less than average cost, which fits this reasoning.Step 5: Options B, C and D discuss other claims that are not required by the relationship between ATC and MC, so option A is correct.

Verification / Alternative check:
You can verify the relationship using a simple numerical example. Suppose the current ATC is 100 per unit. If the next unit has a marginal cost of 80, which is below the average, the new average must be below 100. If the marginal cost were 120, above the average, then the new average would rise above 100. Graphically, the MC curve cuts the ATC curve at its minimum point, and ATC falls when MC is below it. This confirms that ATC declines only when MC is less than ATC.

Why Other Options Are Wrong:
Option B claims that total cost must be declining in absolute terms, which is almost never the case in normal production because total cost generally increases with output, even if the average per unit cost decreases. Option C says marginal cost is greater than average cost, which would imply that ATC is rising, not falling. Option D compares average fixed cost and average variable cost curves; while AFC is always declining and lies above or below AVC depending on levels, this relationship does not determine whether ATC is falling or rising.

Common Pitfalls:
Students commonly confuse movements in total cost with changes in average cost. They may think that a falling ATC means that total cost is falling, which is incorrect; total cost can still be increasing as long as it increases more slowly than output. Another pitfall is to forget the generic rule linking marginal and average values. To avoid mistakes, always remember that a marginal value below the average pulls the average down, a marginal value above the average pulls it up, and equality occurs at the minimum point of the average curve.

Final Answer:
The Marginal Cost is Less than Average Cost