Final answer:
The correct answer is option 4. The U-shape of the average total cost curve arises from the spreading effect at low output levels and the diminishing returns effect at high output levels. These effects lead to a decrease in average cost initially, then an increase as output continues to grow.
Step-by-step explanation:
The average total cost (ATC) curve is known to have a U-shape because of two contrasting effects at different levels of production. Initially, the spreading effect dominates at low levels of output, where the fixed costs are distributed over more units, leading to a decrease in the average cost. As production increases, the diminishing returns effect becomes prominent. This occurs because as more variable resources, like labor, are added to a fixed amount of capital, the additional output per unit of variable resource eventually decreases, causing the average cost to increase.
This interaction of effects gives the ATC curve a U-shape. The correct answer to the fill-in-the-blank question is: The average total cost has a U shape because the spreading effect is dominant at low levels of output, and the diminishing returns effect is dominant at high levels of output. Therefore, option 4) spreading; diminishing returns is the correct choice.
The rationale behind the U-shaped average and marginal cost curves is due to the economics of production within the firm. When a firm begins to produce, it takes advantage of fixed resources by spreading these costs out over more units. However, as production continues to rise, each additional unit starts to cost more due to the diminishing marginal product of the variable inputs.