The Law of Diminishing Marginal Returns

question 188

Multiple Choice

The law of diminishing marginal returns

• A) explains why the average total cost and marginal cost curves are U-shaped in the short run.
• B) explains why the average total cost, average fixed cost and the marginal cost curves are U-shaped in the short run.
• C) causes average total costs to rise at a decreasing rate as output increases.
• D) causes the difference between average total cost and average variable cost to get smaller as output increases.

Identify and understand the implications of fixed and variable costs on pricing and inventory valuation decisions.

Understand the concept of absorption costing versus variable costing and their impact on net operating income.

Calculate net operating income under both absorption and variable costing.

Identify the effects of changes in inventory levels on net operating income under absorption costing.

---

Definitions:

Comparative Advantage

The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than competitors, leading to potential trade benefits.

Specialize

To focus on a specific area of expertise or production, often to increase efficiency or achieve a higher level of skill in that domain.

Producers Worse Off

A situation where producers face decreased profitability or increased costs due to economic changes.

Consumers Better Off

A situation where individuals experience an improvement in their welfare or satisfaction, often through lower prices or higher quality goods and services.