So long as a firm is enjoying increasing marginal returns,a one unit increase in output will cause marginal costs to ________ and total costs to ________.
A)increase; increase
B)decrease; increase
C)increase; decrease
D)decrease; decrease

Question

Quizplus · Accepted Answer

According to the law of diminishing marginal returns, as output increases, eventually the marginal product of the last unit of input decreases. This means that the cost of producing an additional unit of output (marginal cost) will increase. Therefore, a one unit increase in output will cause marginal costs to increase. However, since the firm is still enjoying increasing marginal returns, the increase in total costs will be less than the increase in output, resulting in a net increase in total costs but at a decreasing rate (i.e. total costs will still increase, but at a decreasing rate). Therefore, total costs will increase. Option B correctly captures this relationship.

So Long as a Firm Is Enjoying Increasing Marginal Returns,a