Given a graph that depicts the marginal cost (MC) curve for a firm, which of the following statements is most likely true about the relationship between marginal cost and output?

• A. Marginal cost initially decreases as output increases, then eventually increases due to diminishing returns.
• B. Marginal cost always increases as output increases.
• C. Marginal cost always decreases as output increases.
• D. Marginal cost remains constant regardless of the level of output.

Answer: (A)

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 the typical shape of the MC curve in microeconomics: it often first decreases due to increasing returns to the variable input, then increases because of diminishing returns.
3. Identify that initially, as output increases, marginal cost decreases because of factors like specialization and more efficient use of inputs.
4. Recognize that after a certain point, diminishing returns set in, meaning each additional unit of output requires more input and thus higher cost, causing the MC to rise.
5. Conclude that the MC curve is typically U-shaped, reflecting the initial decrease and subsequent increase in marginal cost as output expands.