Question

As a result of a fire, a small business owner loses some of her computers and other equipment. If the property of diminishing returns applies to all factors of production, she should expect to see a. a decrease in the marginal productivity of her remaining capital and an increase in the marginal productivity of her labor. b. a decrease in the marginal productivity of her remaining capital and a decrease in the marginal productivity of her labor. c. an increase in the marginal productivity of her remaining capital and a decrease in the marginal productivity of her labor. d. an increase in the marginal productivity of her remaining capital and an increase in the marginal productivity of her labor.

Answer 1

Answer:

a. a decrease in the marginal productivity of her remaining capital and an increase in the marginal productivity of her labor.

Explanation:

Diminishing returns In economics is the decrease in the marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, while the amounts of all other factors of production stay constant.

Due to the fire outbreak, the owner will continuously try to increase her manual effort (labor) into the business, which at a point will overwhelm her remaining capital, leading to the decrease in the marginal productivity of what's left of her capital.