Question

The following information is provided to you: Current output amounts to 150 units and the corresponding total cost is $1500. Should production increase to 151 units, total cost would rise to $1515. Is the given data sufficient to conclude that the marginal returns is diminishing? Justify your answer. You may use graph to illustrate your and show the necessary calculation. (10 marks)

Answer 1

Q	TC	ATC	MC
150	1500	10	===
151	1515	10.033	15

Marginal cost is the increment in output when one more unit of output is produced.

MC= ∆TC/∆Q

Average cost is the per unit output cost.

ATC= TC/Q

At the time of diminishing returns both average cost and marginal cost increasing. Marginal cost increases faster than average total cost. The increasing cost implies that the returns from each additional variable input are decreasing.

The law of diminishing returns states that as more and more variable inputs are added to a given fixed factors the returns from addition variable factor decrease. The diminishing returns from an additional factor means that the cost on the additional factor is increasing so that the return from the additional factor diminishing. .