According to the graph, the marginal cost begins to increase when the producer makes which of the following decisions?

• A. Increases fixed costs while keeping output constant
• B. Reduces output to zero
• C. Produces additional units beyond the point of diminishing returns
• D. Operates at the minimum average total cost

Answer: (C)

Verified step by step guidance

1. Understand the concept of marginal cost (MC): it represents the additional cost incurred by producing one more unit of output.
2. Recall that marginal cost typically decreases initially due to increasing returns to the variable input, but begins to increase after a certain point known as the point of diminishing returns.
3. Identify that the point of diminishing returns occurs when adding more variable input results in smaller increases in output, causing the marginal cost to rise.
4. Analyze the options: increasing fixed costs does not affect marginal cost since fixed costs do not change with output; reducing output to zero means no production, so marginal cost is not relevant; operating at minimum average total cost corresponds to the lowest point on the average total cost curve, not necessarily where marginal cost starts to increase.
5. Conclude that marginal cost begins to increase when the producer decides to produce additional units beyond the point of diminishing returns, as this is when the cost of producing each extra unit starts to rise.