a Is it possible that diminishing marginal returns will set

(a) Is it possible that diminishing marginal returns will set in after the first unit of labour is employed? What do total and marginal product curves look like in this case? (b) If the short run total product curve is a straight line through the origin, what do average and marginal product of labour curves look like? What principle would lead you to expect that total product curve would never have this shape? Explain (c) What does the production function tell us? If a firm enjoys economies of scale up to certain output level, and constant returns after that, what can you say about the shape of the long run average cost curve?

Solution

(a) It is possible that diminishing marginal returns set in after the first unit of labor. This is possible if the firm is operating with high level of inefficiency in production, primarily caused by decreasing labor productivity. In this case, total product curve will be upward rising with decreasing slope after 1st unit of labor, until it reaches the maximum point, then will start falling. Correspondingly, marginal product will be falling after 1st unit, become zro when total product reaches its maximum and then becomes negative.

(b) A straight-line total product (TP) curve through origin signifies that output is a continuously increasing function of labor. In this case, both the average product (AP = TP / Units of labor) and marginal product (MP = Change in TP / Change in units of labor) will be constant, so the AP abd MP curves will be horizontal straight lines.

(c) The production function gives us the combination of inputs required to produced a specific level of output. Economies of scale signifies that as output increases, long run average total cost (LATC) decreases, therefore LATC curve is downward sloping in this range. Constant returns to scale signifies that with increase in output, LATC is constant and fixed, therefore LATC is horizontal in this range. Therefore, the shape of LATC will be downward sloping, then followed by a horizontal range.