Question

1. Why is the average total cost curve U-shaped?

    * Specifically, why's it downward sloping at first?

    * Then why is the curve upward sloping at some point?

2. What are the similarities & differences between Diminishing Marginal Returns and Diseconomies of Scale?   

A. Discuss when each occurs.   

B. Discuss what causes each of them.

3. Read another student’s response to these questions and state if you agree or disagree with their answer. Explain why you think it’s correct or not correct.

Answer 1

1) Average total cost curve is U-shaped which means in initial phase of production total cost falls and then starts rising. It is calculated as dividing total cost by output produced. Average total cost is higher at initial level of production and start falling till optimum level of production due to falling marginal cost and starts rising after that.

Till average total cost is falling, there is increasing returns to scale while there is decreasing returns to scale set in when average total cost starts rising.

2) Diminishing marginal returns occurs when marginal output starts falling with rise in inputs installed while diseconomies of scale occurs when rise is cost is proportionate more than rise in output which occurs when per unit cost starts rising.

Diminishing Marginal returns occurs when there are obsolete forms of production which reduces marginal output while diseconomies of scale mostly occurs when there are more labor hired than required which eventually raise the cost of production than raising the production level.