Question

The short-run average total cost curve is U-shaped because 1. average fixed costs decline continuously as output increases. 2. of increasing and diminishing returns. 3. of economies and diseconomies of scale. 4. minimum efficient scale is encountered.

Answer 1

Answer:

2. of increasing and diminishing returns.

Explanation:

In short run cost there are usually fixed factors of production. That is, it refers to a firm's physical ability to produce.

The U shape is as result of decline in average fixed costs eg Rent, and due to diminishing marginal returns to the variable input such as labor.

Because of the law of diminishing returns, once the marginal product of labor initially rises, and reaches it's peak it then continuously falls as production increases thereby creating a U Shape graph.