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At a certain point, employing an additional factor of production causes a relatively smaller increase in output.
The Law of diminishing marginal returns explained
Diagram of diminishing returns
Difference between diminishing returns and dis-economies of scale
Examples of diminishing returns
Diminishing marginal returns to wealthAnother example of diminishing marginal returns could be with regard to wealth. As your wealth increases, initially, your happiness rises as you are able to buy food to eat and a place to live. But, after a certain level of wealth, gaining more wealth doesn’t lead to any rise in happiness. As the old saying goes “money can’t buy happiness”. Further reading
Economics 172 Name: Spring 2006 Quiz 5 1. The marginal rate of technical substitution can be measured by a. the slope of an isoquant. Yup b. the slope of the total product curve. Nope. That’s the marginal product. c. the average product of labor divided by the marginal product of labor d. the slope of the average product curve. 2. The marginal product of a variable input is a. zero at the point where diminishing marginal returns sets in No, it’s still positive. b. the change in the average product that occurs when the variable input is increased one unit. c. the change in the total product that occurs in response to a unit change in the variable input. Sounds right to me. d. the additional output obtained with a proportional increase in all inputs. How about returns to scale? 3. Joey cuts grass during the summer. He rents a lawn mower from his dad. Which of the following statements best illustrates the difference between the short run and the long run for Joey? a. Joey’s friends say they will help him, but when he calls them, they say they have other things to do. With friends like that, who needs friends in the short or long run? b. When Joey acquires more customers, he responds by working more hours. Next year, he will buy a lawn mower and split the work with his brother. In the short run, he can’t buy another piece of capital (a lawn mower). c. Some customers pay Joey immediately; others wait till the following week. That’s a revenue issue, not a long or short run issue. d. Joey has had to turn away some customers because he is already too busy. 4. A firm’s isoquant shows a. the amount of labor needed to produce a given level of output with capital held constant. K and L both vary along an isoquant b. the amount of capital needed to produce a given level of output with labor held constant. c. the various combinations of capital and labor that will produce the same amount of output. Correct d. the change in a firm’s total output over time. 5. Which situation is most likely to exhibit diminishing marginal returns to labor? a. a factory that obtains a new machine for every new worker hired We’re keeping K/L constant here b. a factory that hires more workers and never increases the amount of machinery Diminishing returns will eventually set in. c. a factory that increases the amount of machinery and holds the number of worker constant This will give you diminishing returns to capital. d. None of these situations will result in diminishing marginal returns to labor. |