Question for Thought 1 Only that portion of the MP curve tha

Question for Thought 1. \"Only that portion of the MP curve that lies below AP constitutes the basis for a firm\'s short-run demand curve for labor.\" Explain. SHOT ON MI 6 MI DUAL CAMERA

Solution

Ans

The firm should opera rate in secound stage of diminishing returns to scale. Now this is the stage where MP curve lies below AL curve. In the first stage first firm can increase profits by producing more because there are increasing returns to scale. Here MP lies above AP and it is beneficial to produce more as total product is rising and costs are falling. So firm will be operating in second stage or where MP below AP. It can\'t operate in third stage where marginal product is negative because profits can be increased by producing less.