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CA Foundation · Business Economics · Theory of Production and Cost

A textile manufacturing firm in Tamil Nadu observes that when it increases labour from 5 workers to 6 workers while keeping capital constant, total output rises from 120 units to 126 units per day. The marginal product of the 6th worker is 6 units. If the firm then hires a 7th worker and total output becomes 130 units, what is the marginal product of the 7th worker and what does this trend indicate?

The marginal product of the 7th worker is 4 units (130 − 126). The declining MP from 6 to 4 units demonstrates that diminishing marginal returns are setting in—each additional worker contributes less output because capital remains constant, creating a bottleneck.

  1. A4 units; diminishing marginal returns are setting inCorrect
  2. B6 units; constant marginal returns continue
  3. C8 units; increasing marginal returns are setting in
  4. D4 units; labour has become perfectly elastic in supply

Explanation

Marginal product of 7th worker = 130 − 126 = 4 units. The MP has declined from 6 units (6th worker) to 4 units (7th worker), showing diminishing marginal returns. This occurs because as more of a variable input (labour) is used with a fixed input (capital), each additional unit produces less output. The decline in MP is a classic example of the Law of Diminishing Marginal Returns, not a supply-side phenomenon.

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