A firm produces its product using both capital and labor. When it does not change its capital usage, but doubles its labor input, its output increases by less than 50 percent. Which of the following is the most likely explanation of this finding?
A) the principle of opportunity cost
B) the principle of diminishing returns
C) the marginal principle
D) the spillover principle

Question

Quizplus · Accepted Answer

The principle of diminishing returns states that, after a certain point, adding more units of a variable input, such as labor, to a fixed input, such as capital, will cause the marginal product of the variable input to decrease. This is likely the reason why doubling the labor input resulted in an output increase of less than 50 percent.

A Firm Produces Its Product Using Both Capital and Labor