Suppose output increases in the short run. Total cost will :a)increase due to an increase in fixed costs only.b)increase due to an increase in variable costs only.c)increase due to an increase in both fixed and variable costs.d)decrease if the firm is in the region of diminishing returns.Correct answer is option 'B'. Can you explain this answer?

Question

Answer

Explanation:

In the short run, a firm has fixed costs and variable costs. Fixed costs are costs that do not change with the level of output, while variable costs are costs that do change with the level of output. When the output increases in the short run, it implies that the firm is producing more goods or services. As a result, there are several factors that contribute to the increase in total cost.

1. Increase in Variable Costs:
When the output increases, the firm needs to purchase more inputs or raw materials to produce the additional units. This leads to an increase in variable costs. Variable costs include costs such as labor, raw materials, and energy. Therefore, an increase in output will result in an increase in variable costs.

2. No Change in Fixed Costs:
Fixed costs, on the other hand, do not change with the level of output in the short run. These costs include expenses such as rent, insurance, and salaries of fixed employees. Since the level of output is not affecting these costs, an increase in output will not lead to an increase in fixed costs.

3. Increase in Total Costs:
Considering the above points, when the output increases, the total cost will increase due to an increase in variable costs only. The fixed costs remain constant, so they do not contribute to the increase in total cost. Therefore, option 'B' is the correct answer.

4. Diminishing Returns:
The option 'D' states that total cost will decrease if the firm is in the region of diminishing returns. Diminishing returns occur when the marginal product of an input decreases as more units of the input are added. However, this does not necessarily mean that the total cost will decrease. In fact, the total cost may still increase due to the increase in variable costs associated with producing additional units.

In conclusion, when the output increases in the short run, the total cost will increase due to an increase in variable costs only. Fixed costs remain constant in the short run and do not contribute to the increase in total cost.

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