If a firm's total cost curve is defined by a straight line that has a positive intercept that is equal to fixed costs, then
A) average cost is equal to marginal cost for all levels of output.
B) average cost is negatively sloped and marginal cost is horizontal.
C) both average cost and marginal cost are negatively sloped, but they are not equal to each other.
D) both average cost and marginal cost are horizontal, and average cost is below marginal cost at all levels of output.

Question

Quizplus · Accepted Answer

When a firm's total cost curve is a straight line with a positive intercept equal to fixed costs, it means that variable costs increase at a constant rate with output. This results in a horizontal marginal cost curve (since marginal cost is the change in total cost for a unit change in output, and here it's constant). Average cost, which is total cost divided by quantity, decreases as quantity increases because the fixed cost is spread over more units, making the average cost curve negatively sloped.

If a Firm's Total Cost Curve Is Defined by a Straight