Question

A firm has the following short-run cost schedule: Q=0, TC=$50; Q=1, TC=$58; Q=2, TC = $62; Q=3, TC=$64; Q=4, TC=$65; Q=5, TC=$67; Q=6, TC=$71; Q=7, TC=$78; Q=8, TC=$88; Q=9, TC=$102; Q=10, TC=$121 At what level of output does the firm begin to experience diminishing returns?

a) 7th unit

b) 3rd unit

c) 1st unit

d) 5th unit

Answer 1

Ans: d) 5th unit

Explanation:

There is an inverse relationship between marginal cost and returns in production. It means when marginal cost begins to increase , then the firm will experience diminishing returns. On the other hand , when marginal cost begins to decrease , then the firm will experience increasing returns.

Marginal Cost ( MC) = Change in Total cost / Change in Quantity

Q	TC	MC
0	50	--
1	58	8
2	62	4
3	64	2
4	65	1
5	67	2
6	71	4
7	78	7
8	88	10
9	102	14
10	121	19