Question

Diminishing marginal returns lead to diminishing returns Question 26 options: A) only in theory. B) when marginal returns fall but remain positive. C) when labor exceeds capital. D) when marginal returns become negative.

Answer 1

Answer:

D) when marginal returns become negative.

Explanation:

Generally diminishing marginal returns lead to lower returns, but when capacity constraints are extreme, then adding one extra unit of labor or capital might result in a lower total production, and diseconomies of scale.

For example, you own a pizza place. One worker can produce 10 pizzas per hour, 2 workers can produce 19 pizzas per hour, 3 workers will produce 25 pizzas per hour, but a fourth worker can barely fit in the kitchen and total production will fall to 24 pizzas per hour. When the addition of one extra unit of labor or capital generates a negative return, the marginal return will result in a lower output.

The same applies to a larger company, e.g. a company has a sales team of 50 which generate 400 sales per week. Since the company wants to increase sales they hire 25 more salespeople and total sales increase to 520, but the market is already being saturated, and the salespeople are starting to compete against each other. But management believes they can still increase their sales and hires 25 more salespeople, but the total amount of sales doesn't increase and might even decrease. Instead of working as a team, the salespeople are working against each other and they are ruining other salespeople's sales in order to try to close it themselves.

Just because you keep adding workers, it doesn't mean that more work will get done.