4 Multiple-choice questions (4 points) The law of diminishing marginal returns (

Question

4 Multiple-choice questions (4 points)

The law of diminishing marginal returns

(a) does not hold when the marginal product is always positive;

(b) has to hold when an additional unit of capital produces more extra output than an additional unit of labor;

(c) has to hold when increasing capital makes labor more productive;

(d) holds when the marginal product eventually becomes smaller.

With increasing returns to scale production, output q= f(K,L)

(a) more than doubles when you double labor input L;
(b) less than doubles when you triple all inputs;
(c) more than doubles when you double all inputs;

(d) at least triples if you double all inputs.

With economies of scope,
(a) costs are lower when producing more;
(b) it is less expensive to produce goods jointly than separately;

(c) the production possibility frontier is a straight line;

(d) it is less expensive to specialize production on one product.

Explanation / Answer

(Question 1) Option (d)

Diminishing marginal returns sets in when with increase in inputs, output starts increasing at a decreasing rate, so marginal product starts decreasing.

(Question 2) Option (c)

When doubling of all inputs more than (less than) doubles output, there is increasing (decreasing) returns to scale. When doubling of all inputs exactly doubles output, there is constant returns to scale.

(Question 3) Option (b)

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