Final answer:
Average total costs can behave differently in the short run vs. the long run. Initially, costs may rise with increased output due to fixed inputs, but in the long run, as the firm adjusts all factors of production, costs may decrease due to economies of scale, until the firm grows too large, potentially leading to diseconomies of scale.
Step-by-step explanation:
The statement that average total costs will increase in the short run and then decrease in the long run, after the firm has time to add physical capital, needs clarification.
In the short run, adding more workers may lead to a temporary increase in average total costs if there are fixed inputs that limit productivity.
However, in the long run, all factors, including physical capital, are variable. The firm can adjust all its inputs to find the most efficient way of producing output, potentially leading to economies of scale, where the average cost of producing output decreases as total output increases. Yet, if a firm grows too large and becomes difficult to manage, it may experience diseconomies of scale, where average costs rise with increased output.
Therefore, the answer is not straightforward 'True' or 'False' as it depends on specific circumstances and scale of production. Initially average total costs may rise, but eventually, they can decrease, remain constant, or increase depending on whether the firm experiences economies of scale, constant returns to scale, or diseconomies of scale, respectively.