Association of Chartered Certified Accountants (ACCA) Certification Practice Test

How does the firm's marginal cost curve compare to the U-shaped curve?

1. It is always flatter

2. It rises and falls more steeply

3. It remains constant regardless of output

4. It is identical to the average cost curve

The correct answer is: It rises and falls more steeply

The marginal cost curve typically reflects how the cost of producing one additional unit of output changes in relation to output levels. In many production environments, especially in the short run, the marginal cost curve exhibits a U-shaped behavior. This indicates that initially, as production increases, marginal costs may decrease due to efficiencies of scale or better utilization of resources. However, after reaching a certain point, marginal costs start to rise due to factors such as resource limitations or inefficiencies. Given this context, the statement that the marginal cost curve rises and falls more steeply than the U-shaped curve captures the idea that while the U-shaped curve depicts a gradual change in cost, the marginal cost curve can show sharper increases and decreases at certain production levels. This could stem from specific production processes, variable input prices, or capacity constraints that cause more dramatic changes in cost compared to those reflected by the gradual slope of the average cost curve. The other options don’t properly convey the relationship between marginal cost and average cost curves. Some may imply a lack of responsiveness in cost changes or equate marginal costs directly to average costs, which isn't accurate in reflecting the typical behaviors observed in production economics.