Graph typical total, average, and marginal cost curves and explain how their shapes are influenced by the law of diminishing returns. Graph TC on a separate graph, AC and MC on a second graph.

What will be an ideal response?

TC rises slowly at first and then more quickly once diminishing returns set in (Figure 7-19). Marginal cost, which is the slope of total cost, will be positive but decreasing initially; it will increase at the point of diminishing returns. Average cost will fall at first but eventually will increase. The point of increase is at a larger level of output than the point of diminishing returns. Average cost continues to decline beyond the point of diminishing returns because, at least for a while, declining average fixed cost reduces AC by more than diminishing returns increase AC.

 

Figure 7-19

 


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