Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which curve indicates the typical behavior of costs as production increases in the short run?

1. Average cost curve

2. Marginal cost curve

3. Long-run average cost curve

4. Fixed cost curve

The correct answer is: Marginal cost curve

The marginal cost curve accurately reflects the typical behavior of costs as production increases in the short run. Marginal cost represents the additional cost incurred from producing one more unit of output. In the short run, firms often experience increasing marginal costs due to factors such as diminishing returns, where each additional unit of production requires more input or resources, leading to higher costs. When production begins, costs generally decrease due to economies of scale, but as output continues to rise, the marginal cost typically starts to increase. This trend is depicted in the upward-sloping nature of the marginal cost curve after a certain point of production. This rise indicates that adding more units of production becomes progressively more expensive. When considering the other choices, the average cost curve provides insights into the average cost of production per unit at various levels of output but does not specifically reflect the incremental costs associated with producing each additional unit. The long-run average cost curve illustrates cost behavior when all factors of production can be varied, but it’s typically used in a longer time frame and does not apply to the short-run scenario of the question. The fixed cost curve, on the other hand, remains constant regardless of the level of production since fixed costs do not change with output, which does not address the question regarding