You produce widgets. Currently you produce 4 widgets at a total cost of $40.
(a) What is your average total cost?
(b) Suppose you could produce one more (the ?fth) widget at a marginal cost of $5. If you do produce that ?fth widget, what will your average total cost be? Has your average total cost increased or decreased? Why?
(c) Suppose instead that you could produce one more (the ?fth) widget at a marginal cost of $20. If you do produce that ?fth widget, what will your average total cost be? Has your average total cost increased or decreased, relative to part (a)? Why?