Question

please answer each question in its entirety, thanks!

4. When MP is increasing, Marginal Cost (MC) also must be increasing, and when MP is decreasing, MC also must be decreasing. True or false? Explain.

5. When AP is increasing , ATC must be decreasing, and when AP is decreasing, ATC must be increasing. True or false? Explain.

6. When Total Variable Cost (TVC) is increasing, MC and AVC also must be increasing. True or false? Explain.

Answer 1

Marginal product (MP) measures the change in total product (TP) when one additional unit of the variable factor is employed.

I have graphically illustrated the MP graph below:

The MP curve has a hump shape, with MP of the variable input increasing, reaching a maximum and then declining. Due to increasing marginal returns, the MP curve is increasing initially and then as decreasing marginal returns creeps in, MP curve starts declining.

On the other hand, Marginal Cost (MC) is the change in total cost when one additional unit of the product is produced.

Now, I have graphically illustrated the MC graph below:

The U – shaped MC curve is exactly the opposite to the MP curve. It is declining at first due to increasing marginal returns, reaches a minimum and then starts rising when marginal returns decrease. This shape of the MC curve is due to the law of diminishing marginal returns.

Let us now try to understand the relation between the U-shaped MC curve and the hump-shaped MP curve.

Let us evaluate the stage when the firm is experiencing Increasing Marginal Returns.

When the firm experiences increasing marginal returns, MC is declining because each extra variable input hired is more productive which implies that a given amount of the good can be produced with less input. So, when MP is increasing, MC is declining.

Now let us see what happens when the firm is experiencing decreasing marginal returns.

During decreasing marginal returns, MC increases, and MP is declining.

So, the conclusion is that the rising portion of the MP curve corresponds to the declining part of the MC curve and vice versa.

This relation between MP curve and MC curves implies that the law of diminishing marginal returns is the prime reason for this inverse relation between MP curve and MC curve.

So, the statement given in the above question is false because when MP is increasing, Marginal Cost (MC) must be decreasing, and when MP is decreasing, MC also be increasing.