Question

3.) As output increases, why do marginal cost and average cost eventually increase, in both the short run and long run. pls make a comparison on short run and long run.

Answer 1

This happens because of diminishing returns in the short run and decreasing returns in the long run. In the short run there are both fixed factors and variable factors and when output is increased continuously, marginal product turns negative which causes the marginal cost and average total cost to increase sharply. In the long run there are only variable factors. Even then, there are decreasing returns to scale due to which marginal product falls again as output is increased which causes the marginal cost and average total cost to increase. The difference between the short run and long run is the fact that , there is no average variable cost in the long run due to which average total cost is relatively flatter in the long run.