Question

A watch manufacturer finds that at $1000$units of output, its marginal costs are below average total costs. If it produces an additional watch, will its average total costs rise, fall, or stay the same?

Short answer

If the marginal cost is lower than the average overall cost, the average total cost is likely to fall as more units are produced.

Step-by-step solution

Given Information.

Output$=1000$units.

To find its average total costs rise, fall, or stay the same.

Find the average total costs rise, fall, or stay the same. 

If the marginal cost is less than the average total cost, the average total cost is likely to decrease with additional unit production.

The average cost is likely to fall until the marginal cost equals the average total cost. When the marginal cost exceeds the average total cost, the average total cost rises.

As a result, if a watchmaker decides to produce an additional watch, its average total revenue will fall because marginal cost is less than average total cost.