Question

The ninth worker adds 25 units to total production. The tenth worker adds 22 units to total production. The company has:___________.

Answer 1

Answer:

Diminishing returns

Explanation:

A firm producing widgets (term for a generic good) has two factors of production. The factory and labour. The capacity of the factory is fixed, and the marginal cost (MC) of labour is the same (i.e. each new worker will cost the same).

There are two stages to how MC is affected.

1. Increasing returns (MC goes down)  

As output begins to increase, the large manufacturing  processes/equipment  still not fully utilised means and the additional labour  can be productive as they can always use the equipment to its full potential due to which the MC is relatively low.

2. Constant returns (MC goes sideward)

At this point, labour is producing its optimal output per unit. The marginal cost  is therefore at its lowest.

3. Diminishing returns (MC goes up)

The more labour that is employed, the less marginal output it is able to produce.  This could be a result of too many people to efficiently operate/ rotate use of  machinery. The cost increases more and more to generate an extra unit of  output, because of labour exhibiting diminishing returns in the short run.

In this question, the 10th worker has added 22 units which is 3 units less than the number of units added by the 9th worker, thus the company is producing less marginal output for each worker. so based on the above discussion it can be concluded that the company has Diminishing returns.