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Short vs. long run, Diminishing Product, Fixed vs. Variable

The principal at your nephew's school has been very impressed with the kid's understanding of economic concepts. She has asked that you come speak to the entire school.
1. Give two everyday examples for the law of diminishing product. Please try to think of something creative that we have not heard about yet.
2. You own a business. Tell us about your business and tell us about two things you are considering changing in the short-run and two things that you are considering changing in the long-run.
3. Think of your household budget. Give an example of a fixed cost, a variable cost and a marginal cost in your household.

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Solution Preview

To answer this question you must demonstrate your understanding of the following economic terms:
- law of diminishing product
- short-run
- long-run
- fixed cost
- variable cost
- marginal cost

1. The law of diminishing product states that adding more units of one factor of production will eventually result in lower returns per unit. For example, two carpenters might be able to build a house twice as fast as one carpenter, but one hundred carpenters will not be able to build it one hundred times as fast. They will get in each others' way or have to wait their turn to use a limited supply of tools.
To answer this question you must think of a kind of production, identify the factors of production, and then imagine what will happen if you continually increase one of the factors. For ...

Solution Summary

This solution gives sample answers to 3 common questions found on Microeconomics exams. The concepts covered are:

1. The Law of Diminishing Marginal Product
2. Short run vs. long run
3. Fixed costs vs. variable costs

All three answers give detailed examples.