Question

Bitcom, a manufacturer of electronics, estimates the following relation between marginal cost of production and monthly output: MC= $150+ 0.005Q

What does this function imply about the effect of the law of diminishing returns on Bitcom’s short-run cost function?

Answer 1

From the given function we can clearly state that Bitcom's marginal cost increases as the monthly output of the firm increases.

That means, the cost of producing one additional output increases with the production level.

Now from theory, we knew that when marginal cost increases with increase in the level of production, that means, the firm's productivity decreases as the level of production increases.

That means, the effect of the law of diminishing returns on Bitcom’s short-run cost function is that the firm exhibits decreasing returns to scale.