Question

In problems where the objective is to minimize the total cost of the activities, an activity is said to have decreasing marginal returns if the slope of its cost graph never increases but sometimes decreases as the level of the activity increases?

Answer 1

Diminishing marginal returns occur in the short run when one input increases while others are fixed, and the additional output from each additional input decreases. This contrasts with economies of scale which involve cost reductions as all inputs increase for large-scale production.

Step-by-step explanation:

The question deals with the concept of diminishing marginal returns, which occurs when, after a certain point, each additional unit of input (like labor) produces less and less of an increase in output when other inputs (like capital) are held constant. This is different from economies of scale, which refers to the reduction in long-run average costs as all inputs increase, facilitating larger-scale production. In other words, while diminishing marginal returns are seen in the short run due to one variable input increasing while others are fixed, economies of scale occur in the long run when all inputs are varied together.

It's important to recognize that an activity with diminishing marginal returns is one where the slope of the cost graph is either constant or decreasing, never increasing. This reflects the principle that the additional cost of producing one more unit (the marginal cost) does not rise but may decline, which is indicative of diminishing marginal returns.