A firm's average cost increases as it increases its output by expanding its plant and hiring additional workers (its only inputs to production). The firm's owner blames the increase in per-unit costs on the law of diminishing marginal productivity. The owner's reasoning is:
A) correct because some inputs are fixed in the long run.
B) incorrect because economies of scale are present.
C) correct because marginal productivity must decrease in the short run.
D) incorrect because all inputs are varied in the example.

Question

Quizplus · Accepted Answer

The owner's reasoning is incorrect because the scenario describes a long-run situation where all inputs, including plant size and labor, are variable. The law of diminishing marginal productivity applies to the short run when at least one input is fixed.

A Firm's Average Cost Increases as It Increases Its Output