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explain the law of diminishing returns

1. What is the difference between explicit and implicit costs? Which of the costs is most closely associated with opportunity costs and why?

2. State and explain the law of diminishing returns. How does this law apply to a typical day at work or at school? (Or, if you could imagine, taking an on line microeconomics course).

3 Explain the relationship between AP and MP. Apply a real world example of your own to how this might work.

4. Explain the relationship between MP and TP. Apply a real world example of your own explaining how this might work.

5. Suppose that 1 worker generates 8 units of output, 2 workers generate 20, 3 workers generate 35, 4 workers generate 45, and 5 workers generate 42 units out output.

a. Calculate the MP and the AP for each worker. At what point do diminishing returns set in? How would we know this had occurred?

6. Why does the ATC curve always lie above the AVC curve? Why does the two curves move closer together, but never seem to meet each other?

7. Why is the AFC always declining while the TFC never does so? How can that be?

Solution Preview

1. What is the difference between explicit and implicit costs? Which of the costs is most closely associated with opportunity costs and why?

An explicit cost is one that results in an outlay of money, while and implicit cost relates to opportunity costs. For instance, a firm that must buy office supplies incurs an explicit cost when purchasing the supplies. However, if the owner of the firm used his own savings to start the business, the opportunity cost of the savings, or what the owner could be earning in another investment, represents the implicit cost. Additionally, suppose the owner of the firm has a law degree, the amount of money the owner could be earning as a lawyer is the opportunity cost of his time. The objective then is to earn more in the business than the owner could earn as a lawyer.

2. State and explain the law of diminishing returns. How does this law apply to a typical day at work or at school? (Or, if you could imagine, taking an on line microeconomics course).

Diminishing returns occurs when, after a certain level of output or productivity is achieved, each additional unit of input results in a decreasing amount of output. This is especially applicable to a day at work or school because people cannot simply learn, study, or work continuously for a full day. We need rest and will physically and mentally fatigue to the point where each additional unit of studying or work will ...

Solution Summary

Total cost is exemplified in this solution.

$2.19