Consider a basket- producing firm with fixed capital. If the firm can produce 36 baskets per day with 3 workers and 44 baskets per day with 4 workers, then which of the following statements is true?
A) The marginal product of the fourth worker is 11.
B) With 4 workers, the firm's average product of labour is 13.
C) The firm has passed the point of diminishing average productivity.
D) The marginal product is above the average product.
E) The firm has not yet reached the point of diminishing marginal productivity.

Question

Quizplus · Accepted Answer

The law of diminishing marginal returns states that as additional units of a variable input (such as labor) are added to a fixed input (such as capital), the marginal product of the variable input will eventually decrease. This leads to a point of diminishing marginal productivity, beyond which adding more of the variable input will result in decreasing marginal returns.

In this case, the marginal product of the fourth worker is not provided, so we cannot choose option A.

To calculate the average product of labor, we need to divide the total output by the number of workers. Using the information given, we get:

Average product with 3 workers = 36/3 = 12 
Average product with 4 workers = 44/4 = 11

So option B is incorrect, as the average product of labor decreases when a fourth worker is added.

Option C is correct, as the decrease in average product indicates that the firm has reached the point of diminishing marginal productivity.

Option D cannot be determined without more information.

Option E is incorrect, as the decrease in average product indicates that the firm has already passed the point of diminishing marginal productivity.

Consider a Basket- Producing Firm with Fixed Capital