Describe the law of diminishing marginal returns How does it

Describe the law of diminishing marginal returns. How does it relate to the shape of the marginal cost (MC) and the marginal physical product of labor(MPP) curves? Explain

Solution

Law of diminishing returns explains that when more and more units of a variable input, like labor, is added to a given quantity of fixed inputs, which is capital, the total output may initially increase at increasing rate and then at a constant rate, but it will eventually increase at diminishing rates. Diminishing returns are caused by fall in productivity or the marginal product.

The marginal product or the marginal physical product (MPP) will first increase, decline, reach zero and become negative.

Marginal cost (MC) is the additional cost of producing one more product. MC is U-shaped curve. It will first decline and then increase due to fall in productivity of labor.