Mankiw's Principles of Microeconomics Chapter 13

1. Why do marginal costs first fall and then begin to rise?

The effect of diminishing marginal product impacts the cost curve. Diminishing marginal product is defined as, the property whereby the marginal product of an input declines as the quantity of input increases.

2. Why are marginal costs important to a firm when making decisions to increase or decrease production?

Imagine company that was at the top of its game. It produced at a high level of efficiency and as a result, the stockholders where happy with the outcome, and they choose not to invest in the future of the industry as a whole. This lack of investment in infrastructure would be a good example of a contributing factor to increasing the slope of the company’s marginal cost. If a company chooses to not invest in its infrastructure, then it will take on more cost in order to obtain the same level of efficiency to produce at an equal level of output. To resolve this, the company would want to find the point at which its marginal costs meets its total costs and that would tell them the maximum quantity of output they’ll need in order to maintain an economy of scale.

3. How can you apply these cost concepts to your own life?

If found the readings concerning economics of scale as the most helpful in this chapter. Understanding that there are 2 ways to look at adjusting cost, long term, and short term prove critical in order to maintain constant returns to scale. As a business manager, knowing the point at which your marginal costs (MC) meets your average total cost (ATC) should guide you in your decisions to invest in additional production facilities.