If a firm is experiencing diminishing marginal returns to labor, which of thefollowing must be true?
A)The first workers the firm hired were better than the workers hired later on.
B)The firm is experiencing decreasing returns to scale.
C)The positive effect of specialization in production is being offset by the negative effect of crowding of
Inputs.
D)Output is decreasing.
E)The firm should buy more nonlabor inputs.

Question

Quizplus · Accepted Answer

Diminishing marginal returns to labor occur when the positive effects of specialization (increased efficiency with more specialization) are offset by the negative effects of crowding (decreased efficiency due to limited space/resources). Therefore, option C is the correct answer. Option A is incorrect because it assumes that the quality of workers hired is the cause of diminishing marginal returns, rather than the impact of crowding on efficiency. Option B is incorrect as decreasing returns to scale is referring to the relationship between output and all inputs, rather than just labor. Option D is not necessarily true, as output could still be increasing, just at a slower rate. Option E is not a solution to the problem of diminishing marginal returns to labor.

If a Firm Is Experiencing Diminishing Marginal Returns to Labor