Question

A firm has the following short run total costs, where TC is total cost and Q is output:

Q TC

0 $ 100

1 $ 120

2 160

3 210

4 290

5 390

6 510

7 650

8 810

At Q =5, is the firm operating under increasing or diminishing returns, and why?

Answer 1

here the firm is operating under diminishing returns because as more and more output is being produced the average cost and marginal cost are keep on increasing .as we know if with increased production average cost diminishes then the industry operates under increasing returns because it enjoys economies of scale. here the average cost is increasing after 3rd unit . so here the firm is facing diminishing returns to scale.