1. The idea that given at least one fixed input, there exists an optimal level o
ID: 1166976 • Letter: 1
Question
1. The idea that given at least one fixed input, there exists an optimal level of some other variable input, beyond which each additional unit of the variable input produces fewer and fewer units of output is referred to as:
a) economies of scale
b) marginal costs
c) minimum efficient scale
d) diminishing (marginal) returns
2. Assume that both labor and capital exhibit diminishing returns. Suppose you can hire an additional unit of labor for $10, and she can product 50 units. You could also buy an additional machine at the cost of $200, and that machine would allow you to produce 1000 units.
If your main concern is minimizing average cost, what should you do?
a) Buy the machine, because it will allow you to produce more
b) Nothing, because you are already minimizing cost
c) There is not enough information to make a legitimate response
d) Hire more labor, because it is cheaper
Explanation / Answer
Question 1
The given statement indicates that as one input is kept fixed while others are taken as variable, beyond a point, further increase in quantity of variable inputs results in production of fewer and fewer units of output.
This scenario indicates law of diminishing marginal returns.
Law of diminishing marginal returns state that as quantity of variable inputs in proportion to constant quantity of fixed inputs is increased then after a point , such increase leads to fall in marginal product which implies production of fewer and fewer units of output.
Hence, the correct answer is the option (d).
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