problem of irrigating a crop on a farmer’s field. The plot of land is the fixed factor of production, while the

water that the farmer can add to the land is the key variable cost. As the farmer adds water to the land, output

increases. However, adding increasingly more water brings smaller increases in output, until at some point the

water floods the field and actually reduces output. Diminishing marginal productivity occurs because, with

fixed inputs (land in this example), each additional unit of input (e.g., water) contributes less to overall

production.

Average Total Cost, Average Variable Cost, Marginal Cost

The breakdown of total costs into fixed and variable costs can provide a basis for other insights as well. The

first five columns of Table 7.10 duplicate the previous table, but the last three columns show average total

costs, average variable costs, and marginal costs. These new measures analyze costs on a per-unit (rather than
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