Why short-run marginal cost turns up

In the short run at least one input, such as the size of the plant, is fixed. The firm raises output by adding more of a variable input, usually labor, to that fixed input. At first the added workers can specialize and marginal product rises. Eventually the plant gets crowded: each new worker has less equipment and space to work with, so each adds less output than the one before. That is diminishing marginal returns.

Marginal cost is the wage divided by the marginal product of labor. When marginal product starts to fall, each extra unit of output takes more labor to make, so marginal cost rises. The law of diminishing returns is why the short-run marginal cost curve eventually slopes up.

Each choice

• A. Diseconomies of scale are a long-run idea, about what happens to average cost when the whole firm, plant included, gets bigger. In the short run the plant size is fixed, so scale cannot change.
• B. A firm's costs come from its inputs and how productive they are, not from the price it sells at. The price does not change what it costs to make another unit.
• C. Marginal cost rises even when a firm runs as efficiently as possible. The rise comes from adding workers to a fixed plant, not from waste.
• D. Breaking even is an outcome that compares price with average total cost. It is not a force that changes marginal cost.
• E (correct). Adding workers to a fixed plant eventually lowers each worker's marginal product, so each added unit costs more to make.