CA Foundation · Business Economics · Theory of Production and Cost
A firm's total product with a fixed capital stock is: 1 worker = 8 units, 2 = 20, 3 = 33, 4 = 42, 5 = 48, 6 = 48. At which number of workers does diminishing marginal returns first set in?
Diminishing marginal returns first set in at the fourth worker. Marginal products are 8, 12, 13, 9, 6 and 0 for successive workers. Marginal product peaks at the third worker with 13 units and first declines at the fourth with 9 units.
- AAt the 3rd workerCorrect
- BAt the 4th worker
- CAt the 2nd worker
- DAt the 6th worker
Explanation
Marginal products are: 1st = 8, 2nd = 12, 3rd = 13, 4th = 9, 5th = 6, 6th = 0. MP rises until the 3rd worker (13) and first falls at the 4th worker (9). So diminishing returns first set in at the 4th worker. The 3rd worker is where MP peaks, which is the common error.
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