Chapter 10R, Problem 16MCQ

To determine

The correct option for given situation.

Answer to Problem 16MCQ

Option c is correct.

Explanation of Solution

Explanation for correct option:

c.

The spreading effect refers to the effect of spreading fixed cost over the number of units produced. For instance, if fixed cost is $50,000 and number of units produced is 5000 then per unit fixed cost is $10 whereas if units produced are increased to 10,000 then fixed cost per unit will be reduced to $5 per unit. This is because of spreading effect. Due to this effect the total cost will decline and diminishing returns causes it to rise. Therefore, option c is correct.

Explanation for incorrect options:

a.

Due to spreading effect the average total cost starts declining first then it rises due to diminishing returns. Therefore, option a is incorrect.

b.

Again it does not rises instead ATC (average total cost) starts declining. Therefore, option b is incorrect.

d.

Total average cost declines if spreading effect occurs but the average total cost does not continue to decline as per diminishing returns law. Therefore, option d is incorrect.

e.

Due to spreading effect, the total average cost will reduced initially instead of remaining constant. As per diminishing rule, it will lead to rise later. Therefore, option e is incorrect.

Economics Concept Introduction

Average total cost: Average total cost of production per unit is comprised of two cost components that is average fixed cost and average variable cost. In short-run, fixed cost of the production remains similar.