Appendix 129 Also displayed in Chapter 2, the cubic cost function generates the average (AC) and marginal (MC) cost curves displayed in Figure 4.6. For Y < Y*, marginal cost declines and pulls average cost down with it; this is the region of the total cost curve in which cost is rising at a decreasing rate, which gener- ates increasing returns to scale. Once diminishing returns set in, marginal costs rise and eventually cause average cost to rise as well, which occurs at Y* when total costs begin to increase at an increasing rate. That is, total cost increases at a decreasing rate (marginal cost declines with output) and then increases at an increasing rate (marginal cost increases with output), thus causing average cost to rise. This is also analogous to Figure 4.3. These are the classic "textbook" examples that all principles of economics students are taught: marginal cost declines in the increasing returns-to-scale portion of the total cost curve, which causes average cost to decline; when decreasing returns to scale set in, marginal cost begins to rise, thus causing aver- age cost to rise (marginal cost cuts the average cost curve at its lowest point), which results in the classic U-shaped average cost curve. As stated in Chapter 2, the cubic form of the cost equation is the appropriate specification for generating average and marginal cost curves that accord to economic theory. The author has began experimenting with the cubic form of her quadratic cost model, which is given by