Question

All inputs in a business are equally productive at all activities. As the business increases its output, marginal opportunity cost Select one:

A. decreases but eventually increases.
B. increases but eventually decreases.
C. increases.
D. decreases.
E. is constant.

Answer 1

Marginal opportunity cost increases as a business increases its output due to diminishing marginal productivity. The correct multiple-choice answer to the question is C. 'increases'. This is based on the concept of diminishing marginal returns, different from economies of scale.

Step-by-step explanation:

The student's question concerns how the marginal opportunity cost behaves as a business increases its output. We have learned that marginal opportunity cost increases because of diminishing marginal productivity, as noted in the Production in the Short Run section. This concept is well exemplified by the scenario with barbers: the marginal product (or marginal gain) increases initially but begins to decrease after a certain point as additional units of labor (i.e., barbers) are added. The correct answer is that as a business increases its output, the marginal opportunity cost increases. This answers the multiple-choice question with the option C. 'increases'.

Diminishing marginal productivity is observed in the short run when variable inputs increase while others remain fixed, resulting in increasing marginal costs. This should not be confused with economies of scale, which happen in the long run when all inputs can be varied, potentially leading to decreasing average costs as production expands.