Question

Over the positively sloped portion of the​ short-run average-cost​ curve, the effect of​ ________ dominates the effect of​ ________.

a. increasing marginal​ productivity; decreasing fixed cost
b. diminishing marginal​ returns; decreasing fixed cost
c. diminishing marginal​ returns; falling average fixed cost
d. increasing marginal​ productivity; falling average fixed cost

Answer 1

c. diminishing marginal returns; falling average fixed cost. When total investment increases, the total return on investment as a fraction of the total investment decreases. This is the definition of diminishing marginal returns. In this positive portion of the curve, average fixed costs are falling, but total return on investment as a fraction of the total investment is dropping more.