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?

Answer 1

ANSWER-1) Average fixed cost (calculated as TFC/Q) declines continuously because a fixed amount of capital cost is spread over more units of output. The curves of marginal cost (calculated as change in TC/change in Q), Average variable cost (= TVC/Q), and Average total cost (= TC/Q) are U-shaped showing the influence of first increasing and then diminishing returns. When production function exhibits increasing returns to the scale, it indicates that the amount of factors of production in a given proportion will raise the total output more than proportionately will increase total output and output per worker. The law of diminishing returns states that as a firm utilizes more of a variable input, given the quantity of fixed inputs, the marginal product of the variable input eventually diminishes. Thus as output increases, marginal cost will consequently increase due to the law of diminishing returns