Question

State the law of diminishing marginal productivity.

Hint:

The law of diminishing marginal productivity is important for understanding how businesses manage their inputs and determine the optimal level of production.

Answer 1

The law of diminishing marginal productivity states that as more units of a variable input (such as labor) are added to a fixed amount of other inputs (such as capital or land), the additional output (marginal product) produced by each additional unit of input will eventually decrease, holding all other factors constant. This law is fundamental in the study of production and helps explain why firms experience decreasing returns to scale in the short run.
Step 1: Explanation of the Law.
Initially, when a firm increases the quantity of variable inputs, such as labor, the marginal productivity of each additional unit of input may increase or remain constant due to better utilization of fixed resources. However, after a certain point, the marginal product of labor starts to decline because the fixed inputs become fully utilized, and overcrowding or inefficiency occurs.

Step 2: Example of Diminishing Returns.
For example, consider a factory where more workers are hired, but the number of machines remains constant. Initially, each additional worker might increase production significantly. However, as more workers are hired, they may have to share machines, and the factory becomes overcrowded. Eventually, adding more workers leads to smaller increases in output, and may even result in a decrease in productivity.