As a firm buys more capital and less labor, the marginal physical product of capital __________ and the marginal physical product of labor __________, assuming the law of diminishing marginal returns has set in for each factor.

Question

Quizplus · Accepted Answer

The law of diminishing marginal returns states that as more of one input (capital) is added, holding other inputs constant (labor), the additional output produced from the additional input will eventually decrease. Therefore, the marginal physical product of capital decreases because each additional unit of capital adds less output than the previous. Conversely, using less labor means the marginal physical product of labor increases because each remaining unit of labor is now more productive due to having more capital to work with.

As a Firm Buys More Capital and Less Labor, the Marginal