Correct Option: C. Marginal cost increases
Detailed Explanation:
- Understanding Diminishing Returns:
- Diminishing returns, also known as diminishing marginal returns, occurs when adding an additional factor of production results in a smaller increase in output. This typically happens in the short run when at least one factor of production (like capital) is fixed, while others (like labor) are variable.
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For example, if a factory has a fixed number of machines (capital) and keeps hiring more workers (labor), each additional worker will contribute less to total output than the previous one after a certain point.
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Marginal Cost (MC):
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Marginal cost is defined as the additional cost incurred by producing one more unit of a good or service. It can be calculated using the formula:
[
MC = \frac{\Delta TC}{\Delta Q}
]
where ( \Delta TC ) is the change in total cost and ( \Delta Q ) is the change in quantity produced.
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Impact of Diminishing Returns on Marginal Cost:
- As a firm experiences diminishing returns, the additional output produced by each new unit of input (like labor) decreases. This means that to produce more output, the firm must employ more and more input, which leads to higher costs.
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For instance, if the first few workers significantly increase output, but subsequent workers add less and less to total output, the cost of producing each additional unit rises. Therefore, as output increases, the marginal cost also increases.
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Graphical Representation:
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If we were to graph this, the marginal cost curve would typically slope upwards as output increases. Initially, marginal costs may decrease due to efficiencies, but once diminishing returns set in, the curve begins to rise.
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Why Other Options Are Incorrect:
- A. Marginal cost decreases: This option is incorrect because diminishing returns imply that each additional unit of input contributes less to output, leading to higher costs for each additional unit produced.
- B. Marginal cost remains constant: This option suggests that the cost of producing each additional unit does not change, which is not the case when diminishing returns are present. As output increases, the marginal cost will rise due to the inefficiencies introduced by over-utilizing variable inputs.
- D. Marginal cost becomes negative: This option is not feasible in economic terms. Marginal cost cannot be negative because it represents the cost of producing an additional unit. A negative marginal cost would imply that producing more units reduces total costs, which contradicts the principles of production and cost.
Summary:
- Diminishing returns occur when adding more of a variable input to a fixed input results in smaller increases in output.
- As diminishing returns set in, the marginal cost of production increases.
- The correct answer is C: Marginal cost increases as output increases due to the inefficiencies of over-utilizing variable inputs.
- Understanding the relationship between marginal cost and diminishing returns is crucial for making production decisions in the short run.