According to the theory of cost,specialization in the use of variable resources in the short-run results initially in:
A) decreasing returns and declining average and marginal costs
B) increasing returns and declining average and marginal costs
C) increasing returns and increasing average and marginal costs
D) decreasing returns and increasing average and marginal costs
E) none of the above

Question

Quizplus · Accepted Answer

According to the law of diminishing marginal returns, increasing the amount of one variable factor while holding all others constant will eventually lead to decreasing marginal returns. However, in the short-run, as a firm specializes in the use of one variable factor, it can take advantage of economies of scale and experience increasing returns. This leads to decreasing average and marginal costs, as fixed costs are spread over a larger output. Therefore, option B is the correct answer.

According to the Theory of Cost,specialization in the Use of Variable