Production & Costs Discussion The theory of the firm seeks to understand what motivates firms to make the operating decisions that they do. Focusing on production and costs (the cost of producing a given quantity of output), provides the necessary background information to do that. Assignment Objective Explain diminishing returns/relationship between average total cost and marginal cost using a real-world explain. Differentiate between the three types of cost. Directions Pick ONE of the three options… Option 1: What do economists mean by diminishing returns to an input? What causes diminishing returns? Have you ever observed this principle at work in a job youve had? Describe how youve experienced this concept in the real world.