When a production function exhibits a marginal product of labour that is diminishing (but positive):

Question

Quizplus · Accepted Answer

Diminishing marginal product of labor means that each additional unit of labor added to the production process leads to a smaller increase in output than the previous unit of labor. However, output still increases as more workers are employed. Therefore, choice C is the best answer as it describes the situation accurately. Option A is incorrect as output does not decline, and option B is not necessarily true as the firm can still profitably employ workers as long as their marginal product is positive. Option D is also not necessarily true as the firm can still be maximizing profit, just not at the current level of employment.

When a Production Function Exhibits a Marginal Product of Labour