Association of Chartered Certified Accountants (ACCA) Certification Practice Test

How does the firm's marginal cost curve behave?

1. It remains constant

2. It rises and falls more steeply than the U-shaped curve

3. It is horizontal

4. It only rises

The correct answer is: It rises and falls more steeply than the U-shaped curve

The firm's marginal cost curve typically reflects the change in total cost that comes from producing one additional unit of output. When considering the behavior of this curve, it is essential to understand the concept of increasing and decreasing returns to scale. The marginal cost curve is usually U-shaped, indicating that at first, as production increases, the marginal cost may decrease due to efficiencies and improved processes. However, after a certain point, the marginal cost begins to rise sharply due to diminishing returns, where each additional unit produced incurs a higher cost than the last. This can occur because, as production scales up, the firm might face limitations such as congested resources or increasing prices for inputs needed for production. In the context of this question, the correct answer indicates that the marginal cost curve not only has the potential to rise but can also fall steeply, reflecting the nuanced behavior of costs at different levels of production. This is why the marginal cost curve might rise and fall more steeply than what is typically observed in a standard U-shaped depiction. This behavior accurately captures the complexity of cost changes associated with varying levels of output.