Why does the marginal cost curve decrease initially, but then start to increase?

Question

BlackTom AI · Accepted Answer

Specialisation and division of labour raise the productivity of additional workers at low output, lowering marginal cost; later, diminishing marginal returns to the variable input make each extra worker add less output, raising marginal cost.

Relevant concepts:
- Marginal cost (MC) is the additional cost of producing one more unit of output: MC = ΔTC / ΔQ.
- If labor is the variable input and wage = w, total variable cost ≈ wL, so ΔTC = w ΔL and MC = w (ΔL/ΔQ) = w / MPL, where MPL is the marginal product of labor.
- Increasing (or rising) MPL implies falling MC; falling MPL (diminishing returns) implies rising MC.
- Specialisation/division of labour initially increase MPL; the law of diminishing marginal returns eventually reduces MPL when fixed inputs constrain production.

Step-by-step reasoning:
1. Start from MC = ΔTC/ΔQ. With labor as the variable input and wage w, ΔTC = w ΔL, so MC = w / MPL.
2. At low output, workers can specialise and divide tasks, so MPL increases: the denominator (MPL) rises → MC falls.
3. As more workers are added given fixed capital (machines, workspace), MPL eventually falls (diminishing returns): MPL decreases → MC rises.
4. Thus the MC curve is U-shaped: falls first, then rises.

Why option d is correct:
- It correctly identifies specialisation/division of labour as the cause of the initial fall in MC and diminishing returns as the cause of the subsequent rise, matching the MPL–MC relationship.

Why the other options are incorrect:
- a and c incorrectly invoke the law of supply (which describes price–quantity supplied behavior, not the micro reason for MC shape).
- b reverses the causal direction (diminishing returns would not make MC fall initially; they make MC rise).

Therefore, the correct answer is option d.

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