7.5 Types of cost, revenue and profit, short-run and long-run production

a) Explain the law of diminishing returns and its relevance to the shapes of the marginal cost curve and the average variable cost curve of a firm. [12]

a) Explain the link between diminishing marginal returns and the shape of a firm's short-run marginal cost curve and short-run average total cost curve. [12]

b) 'In large firms the long-run average cost falls as output increases and consumers benefit from lower prices. In small firms it does not. There is, therefore, no place in a modern economy for small firms.' Do you agree with these statements? [13]

b) Discuss the relative importance of marginal cost and average variable cost in determining short-run production decisions. [13]