Question

What happens to variable costs during the onset of production when marginal product is increasing?

Answer 1

When marginal product is increasing during the onset of production, variable costs typically experience a decline in their per-unit amount. This is due to the effect of economies of scale.

In the initial stages of production, when the marginal product (additional output produced by each additional unit of input) is increasing, it means that each additional unit of input (like labor or raw materials) contributes significantly more to the total output. This scenario usually leads to improved efficiency and productivity.

As a result, the total output increases at a rate faster than the increase in total variable costs. Therefore, the per-unit variable cost (cost per additional unit produced) tends to decrease. This is due to the spreading of fixed costs (costs that do not change with the level of output, like machinery, rent, etc.) over a larger quantity of output, making each unit of output less costly to produce.

Answer 2

As production commences and the marginal product increases, variable costs initially rise at a decreasing rate. This occurs because each additional unit of input contributes more to output, but as diminishing marginal productivity sets in, variable costs start to increase at an accelerating rate.

Step-by-step explanation:

What happens to variable costs during the onset of production when marginal product is increasing? As production begins and the marginal product is increasing, variable costs initially may increase at a decreasing rate. This is because each additional unit of the variable input (e.g. labor or materials) contributes more to production, thereby increasing output more than the previous units did. This can be observed in the instance of a barber shop: when increasing the number of barbers from zero to one, output significantly rises with a substantial marginal gain. However, when diminishing marginal productivity starts to occur—meaning each additional unit of input yields less additional output—variable costs will then begin to rise at an increasing rate as more inputs are required to increase production further.

For instance, when the number of barbers is increased further, although output increases, each additional barber contributes less to the increase in output. This decrease in productivity (from a marginal gain of 24 when rising from one to two barbers, down to 12 when rising from three to four barbers) signals that diminishing marginal productivity has set in, and this leads to an increase in variable costs at an increasing rate for each additional unit of input added beyond this point of diminishing returns.