When a firm with low marginal costs and fixed development costs adds more customers, the average total cost of output increases.

Question

BlackTom AI · Accepted Answer

Consider the idea behind average total cost (ATC), which is the sum of average fixed cost (AFC) and average variable cost (AVC).
Option 1: True. If a firm has low marginal costs and fixed development costs, the claim that ATC increases as the firm adds more customers would require ATC to rise despite producing more units. In typical cost structures, spreading fixed development costs over a larger output lowers AFC, and if marginal cost is low, AVC does not rise enough to offset the AFC drop. Therefore, ATC would not necessarily increase; this makes the statement questionable and generally false.
Option 2: False. The standard effect of increasing quantity in the presence of fixed costs is to reduce ATC through spreading those fixed costs over more units (AFC falls). Even if marginal cost is low, adding customers increases total cost only by the small amount needed for each additional unit, while the fixed costs are allocated across a larger output, pulling ATC downward.
In summary, the assertion that ATC increases with more customers under low marginal costs and fixed development costs contradicts the typical behavior of ATC as output expands, so this statement is incorrect.

When a firm with low marginal costs and fixed development costs adds more customers, the average total cost of output increases.

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