Question

Over a five-year span, the ABC Co. reduced the amount of labor it hired. At the same time, the marginal productivity of labor increased. Which of the following COULD explain this observation? (a)the law of diminishing marginal returns (b)labor saving technical change (c)organizational innovation (d)All of the above.

Answer 1

Answer: D. All of the above

Explanation: The three options listed could explain why the productivity of labor increased with a reduction in the quantity of labor hired. The law of diminishing returns states that as more and more inputs of production are added, a time comes in when additional inputs causes no corresponding increase in productivity. At points like this a reduction in the input added would restore productivity.

Reducing the amount of labor obviously is a labour saving technical change. Changes in organizational innovation can also result in changes in productivity.