Increasing marginal cost of production explains which of the following economic phenomena?

• A. Why demand curves are downward sloping
• B. Why average total cost always decreases with output
• C. Why supply curves are typically upward sloping
• D. Why fixed costs remain constant as output increases

Answer: (C)

Verified step by step guidance

1. Understand the concept of marginal cost: Marginal cost is the additional cost incurred by producing one more unit of a good or service. When marginal cost is increasing, it means producing each additional unit becomes more expensive than the previous one.
2. Relate increasing marginal cost to the supply curve: In microeconomics, the supply curve shows the relationship between the price of a good and the quantity supplied. When marginal costs increase, producers need a higher price to cover the higher cost of producing additional units, which causes the supply curve to slope upward.
3. Analyze why increasing marginal cost does not explain demand curve behavior: Demand curves slope downward because of consumer preferences and diminishing marginal utility, not because of production costs.
4. Consider average total cost behavior: Average total cost can decrease, increase, or stay constant depending on economies of scale and fixed costs, so increasing marginal cost does not guarantee that average total cost always decreases.
5. Recognize that fixed costs remain constant regardless of output: Fixed costs do not change with the level of production, so increasing marginal cost does not affect fixed costs.