The U-shaped average total cost curve is
A) a result of firms' wanting to find the output level where cost is at its minimum.
B) unrealistic because average total cost always increases as output increases.
C) the result of average fixed cost falling and decreasing marginal returns as output increases.
D) a result of constant marginal returns.
E) a result of increasing marginal returns.

Question

Quizplus · Accepted Answer

The U-shaped average total cost curve is a result of average fixed cost falling and decreasing marginal returns as output increases. As output increases, the fixed cost is spread over a larger number of units, leading to a decrease in average fixed cost. However, as output continues to increase, diminishing marginal returns result in an increase in marginal cost, which causes the average total cost to increase. Therefore, the average total cost curve is U-shaped.

The U-Shaped Average Total Cost Curve Is