Marginals+Act+Like+Magnets+to+Averages

As marginal cost goes down, average cost also goes down, and when marginal cost goes up, average will also be pulled up. This is because when a marginal is added, the new average is recalculated with the marginal cost of the latest unit added. Product curves work the same way, except they are mirror images of cost.

Because of this, the maximum or minimum of the average curve will always intersect the marginal curve. The point of intersection is also a point on the long run production or cost curve. In general, cost curves decrease initially, hit a minimum when diminishing marginal effects begin to influence the curve, and begin to increase again. Production curves increase initially, reach a maximum when diminishing marginal effects begin to influence the curve, and eventually start to decrease.

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Links: http://en.wikipedia.org/wiki/Marginal_cost http://answers.yahoo.com/question/index?qid=20070417154600AA3w0q2 http://www.pcecon.com/notes/AveMargApp.html

Question: If your average is 80 and the next marginal is 70, which way will your average go? a. Up b. Down c. Stay the same

The answer is b.