Question 39

Average variable costs rise in the short run due to diminishing marginal returns.

As production increases, the addition of variable inputs leads to a decrease in the incremental output produced by each additional unit, resulting in higher average variable costs.

A) Increasing competition

Increasing competition typically affects market prices and may lead to cost efficiencies rather than rising average variable costs. It does not directly correlate with the behavior of average variable costs in the short run, making this option incorrect.

B) Diminishing competition

Diminishing competition may lead to higher prices and potentially lower efficiency in resource allocation, but it does not specifically explain why average variable costs would rise. Thus, this option does not address the core reason for rising average variable costs, making it incorrect.

C) Increasing marginal returns

Increasing marginal returns imply that each additional unit of input contributes more to output than the previous units, which would actually decrease average variable costs. Therefore, this option is also incorrect as it contradicts the rising nature of average variable costs in the short run.

D) Diminishing marginal returns

Diminishing marginal returns occur when adding more of a variable input results in smaller increases in output. This phenomenon leads to higher average variable costs because each additional unit of input is less productive, thus raising the cost per unit of output.

Conclusion

Diminishing marginal returns is the definitive reason for the rise in average variable costs in the short run, as it directly links input increases to reduced productivity. All other options fail to accurately explain this relationship, either by misrepresenting market dynamics or contradicting fundamental economic principles.