Average total costs increase when marginal costs are greater than average total costs.
Assume the following costs: Fixed cost = 100. The marginal cost of the first unit of output equals $10
(MC1), the marginal cost of the second unit of output equals $12 (MC2), MC3 = 14. Total costs for three units of output equals FC + VC which here equals $100 + ($10 + $12 + $14) which equals $136. Average total costs equals $136/3 or $45.333. If MC4 = $16 which is smaller than average total cost the average total cost will decline. Thus, total cost becomes $136 + $16 = $152 thus making average total cost equal
$ 152/4 or $38. Thus, when marginal cost is smaller than average total cost, the average total cost will decline.