Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What does the marginal cost curve typically do compared to the average cost curve?

1. It rises and falls less steeply

2. It remains constant

3. It rises and falls more steeply

4. It is always equal to the average cost

The correct answer is: It rises and falls more steeply

The marginal cost curve typically rises and falls more steeply than the average cost curve because it reflects the cost of producing one additional unit of output at various levels of production. As production increases, marginal costs can change significantly due to factors such as varying input costs, efficiencies of scale, and capacity constraints. Initially, as output increases, marginal cost may decrease due to economies of scale; however, after reaching a certain level of output, marginal cost tends to increase as the production process encounters limitations, leading to less efficient production. This can result in the marginal cost curve exhibiting more steep and variable movements than the average cost curve, which typically shows a smoother trend as it represents the total costs divided by the number of units produced over a wider range of outputs. Thus, it is correct that the marginal cost curve rises and falls more steeply in comparison to the average cost curve.