Question

Up to which level of output will the firm experience increasing marginal returns? Explain why there are increasing marginal returns. (4 marks)

Εοιιυιι ο (ο μυιΠιο) και ναντι Ise the figure below and answer bo MC ATC AVC Cost (dollars per gallon) 0 10 20 30 40 50 60 70 80 90 100 Quantity Igallons of ice cream per hour) Paragraph

Answer 1

The law of increasing return operates upto the optimum point ie the point of maximum return.As a business expands and moves towards the optimum, the return per unit goes on increasing ie the cost of production falls. If the business is expanded beyond the optimum point profit will decline and the law of diminishing return will operate.Increasing return means lower cost per unit. Thus increasing return means cost per unit of marginal output falls with  expansion of the industry.

In the diagram MC intersects both AC and AVC at their minimum point . At the level of optimum output average cost is minimum where MC cuts the ATC curve from below.So upto this level the firm experiences increasing return (ie upto output 60 in the diagram ).