Final answer:
The correct option is B. the average contribution must rise. This happens when the marginal product of an additional unit of input is higher than the average product, which results in an increase in the average product. Understanding these concepts is key to analyzing production decisions and market structures in business economics.
Step-by-step explanation:
If the contribution to output of an additional unit of the variable input exceeds the average contribution of the variable inputs used, then B. the average contribution must rise. This is because the average product (or average contribution) is calculated as total output divided by the number of units of input. When the contribution of the additional unit is larger than the current average, it pulls the average upward.
Consider an example where a company produces goods using labor as a variable input. If the firm is initially producing with two workers and making 40 units, its average product is 20 units per worker. If they add a third worker and total production increases to 70 units, the marginal product of the third worker is 30 units (since 70 - 40 = 30). This marginal product is greater than the initial average product of 20 units per worker, and the new average product will now be 23.33 units per worker (70 units / 3 workers). This demonstrates that when the marginal product of the additional unit of input is higher than the average product, the average product will indeed increase.
Understanding this relationship is essential in the analysis of production in the short run; where variable and fixed inputs interact to determine output levels. Moreover, it is crucial to consider that, over time, diminishing marginal productivity may occur, explaining why variable costs can rise at increasing rates at higher levels of production, as detailed in the section on Production in the Short Run.
Concerning average variable costs, they are calculated by dividing the variable cost by the total output at each level of output. When this cost is below the market price, assuming no fixed costs, the firm has the potential to earn profits. In terms of long-term production, it's worth noting the implications of the long-run average cost curve and economic situations such as monopolies that may arise when economies of scale are present and the demand is inelastic. As suggested in the scenario with the single firm producing under a monopoly, a company that wants to challenge the monopoly but produces less than the optimal output level will face higher average costs, making it unable to compete without sustaining losses.