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Definition and example of the Law of Diminishing Returns

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The following table gives total output or total product as a function of labor units used.

LABOR TOTAL OUTPUT
0 0
1 5
2 9
3 12
4 14
5 15

a) Define diminishing returns.
b) Does the table indicate a situation of diminishing returns? Explain.

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Solution Preview

a) The Law of Diminishing Returns states that as more units of one input are added, with ...

Solution Summary

What are diminishing returns? Is the given data an example of diminishing returns? How do we make that determination?

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See Also This Related BrainMass Solution

Opportunity Costs and Perfect competition

Problems:

1. Explain how opportunity cost is related to the producer's supply curve.

2. Explain why the minimum price necessary rises as the producer produces more output.

3. Define profit.

4. What are the assumptions of a perfectly competitive market.

5. Describe the demand curve faced by the individual firm. Draw the individual firm's demand curve.

6. Describe the short-run and the long-run.

7. Define diminishing marginal returns. Define marginal product. Explain why diminishing returns occur.

8. Define fixed costs, variable costs, marginal cost, and total costs.

9. Explain how the firm decides whether or not to shutdown.

10. Define average total cost and average variable cost. Calculate ATC, AVC, and MC from the following:

Workers Output Fixed cost Variable cost
per day per day ($/day) ($/day)
0 0 40 0
1 80 40 6
2 200 40 12
3 260 40 18
4 300 40 24
5 330 40 30
6 350 40 36
7 362 40 42
11. If the price per unit of output is 62 cents per unit what will be the profit-maximizing output level?

12. If the wage is $12 per day, instead of $6, and the price is 35 cents per unit, what will be the profit-maximizing output?

13. Draw a graph of MC, ATC, AVC, and price. Find the profit-maximizing output level graphically. Find the area representing profit on the graph.

14. Define producer surplus. Show the area representing producer surplus on a graph.

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