Final answer:
The Curvilinear cost is the cost that has a variable component and displays both decreasing and increasing marginal costs as output changes, producing a U-shaped curve.
Step-by-step explanation:
The cost that exhibits both decreasing and increasing marginal costs over a specific range of activity is the Curvilinear cost. This is because curvilinear costs have variable costs that change with the level of output, and they can display economies and diseconomies of scale, resulting in a U-shaped curve that first decreases, then increases as production expands. Initially, an increase in production may lead to greater efficiency and lower costs per unit. However, as production continues to rise, the company may experience inefficiencies such as overuse of machinery or employee fatigue, which can result in increased marginal costs.
To elaborate, with curvilinear costs, a business might experience decreasing marginal costs as it benefits from learning effects and economies of scale when output is low. As production increases, costs are spread over a larger number of units, which reduces the average cost. Nevertheless, beyond a certain point, diminishing marginal returns set in, and the marginal cost of producing each additional unit starts to rise. This pattern is akin to what might happen in a manufacturing plant that operates non-stop, eventually leading to increased costs for maintenance and repairs.
Understanding these cost behaviors is critical for managers as they plan production levels, make pricing decisions, and analyze the profitability of their products or services. An accurate prediction of cost behavior allows firms to optimize their operations and establish competitive pricing strategies.