Q.State and explain the relationship between Average Cost (AC) and Marginal Cost (MC).

AC and MC are linked through a simple rule about averages: an average falls when the next addition is below it, and rises when the next addition is above it. …

The relationship follows from ordinary arithmetic about averages, applied to cost. Whenever the cost of producing one more unit (MC) is less than the existing average cost (AC), adding that unit's cost into the average pulls the average down — so AC must be falling. Whenever MC is greater than the existing AC, adding that unit's cost pulls the average up — so AC must be rising.

Because AC falls whenever MC is below it and rises whenever MC is above it, the only way AC can stop falling and start rising is at the exact output where MC equals AC — this must be AC's minimum point. Beyond that output, MC continues to rise (as explained by the law of variable proportions) and, since MC now exceeds AC, it drags AC upward too, though AC always remains above MC once past this c …

Students sometimes state the rule backwards, saying 'AC cuts MC' or that the crossing happens at MC's minimum — the correct statement is that MC cuts AC (and separately, AVC) from below, and …