Suppose you run a pizza shop and currently have two employees. If you hire a thi

Question

Suppose you run a pizza shop and currently have two employees. If you hire a third employee, your output of pizzas per day rises from 55 to 65. If you hire a fourth employee, output rises to 80 per day. A fifth and sixth employee would cause output to rise to 90 and 95 per day, respectively. Pick the correct statement:

a) diminishing returns set in with the hiring of the fourth worker
b) diminishing returns set in with the hiring of the fifth worker
c) diminishing returns set in with the hiring of the sixth worker
d) diminishing returns set have not yet set in because output still increases.

Explanation / Answer

Suppose you run a pizza shop and currently have two employees. If you hire a third employee, your output of pizzas per day rises from 55 to 65. If you hire a fourth employee, output rises to 80 per day. A fifth and sixth employee would cause output to rise to 90 and 95 per day, respectively. Pick the correct statement: a) diminishing returns set in with the hiring of the fourth worker b) diminishing returns set in with the hiring of the fifth worker c) diminishing returns set in with the hiring of the sixth worker d) diminishing returns set have not yet set in because output still increases. Answer B. When we hired the fourth worker we got 15 extra pizzas, but only 5 extra pizzas from hiring the 5th worker. MPL (3rd)=10 MPL (4th)=15 MPL (5th)=5 MPL (6th)=5

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