Chapter 10R, Problem 11MCQ

To determine

The correct option for rising marginal cost.

Answer to Problem 11MCQ

Option a diminishing marginal returns is correct.

Explanation of Solution

Explanation for correct option:

a.

Marginal cost increases when the marginal returns starts declining. This is because the company has achieved the economies of scales and additional units produced above such level will increase the cost of production for additional units produced lowering returns. For instance, if additional workers are hired for task then it will reduce the marginal cost due to greater specialization and increasing returns but if specialization is achieved then additional workers will increase the marginal cost of production.

Explanation for incorrect options:

b.

If marginal returns are increased then the cost of marginal production will be reduced. Therefore, option b is incorrect.

c.

Constant returns to scale means the cost of production is stable and there are no fluctuations in the total cost of production. This can be achieved when no additional units are produced. Therefore, option c is incorrect.

d.

Increasing returns will lower the marginal cost because the company has not achieved full economies of scale. Once the level is achieved, the returns starts declining and leads to rising marginal cost.

e.

If marginal cost is increased then average total cost also increases that will reduce the average returns. Thus, option e is also incorrect.

Economics Concept Introduction

Marginal cost: Marginal cost refers to the cost of production which is incurred by the firm if one additional unit is produced. In other words, marginal cost is the cost incurred by the firm for producing an additional unit.