Question

ollowing is information on the production levels of three different firms.o Firm A is currently producing at a quantity where it is experiencing increasing returnso Firm B is currently producing at a quantity where it is experiencing diminishing returnso Firm C is currently producing at a quantity where it is experiencing negative returnso If each of the firms adds to its labor force, what will happen to its marginal product of labor?

Answer 1

Answer:

The changes in the marginal product of labor of the three firms A, B and C will be increase, decrease and decrease respectively.

Explanation:

Firm A is operating on increasing returns, this means when addition to labor force will increase the output level to a greater extent. So, the marginal product of labor which is the ratio of change in output to change in input will increase.

Firm B is operating on decreasing returns which means increase in input is leading to less proportionate increase in output. So, here the marginal product of labor will fall as output will increase less than labor.

Similarly, for firm C the marginal product of labor will decline. Negative returns imply that increasing labor is lading to a reduction in output level. So, the ratio of change in output level to change in input level will fall further when input level is increased.