Reed's Accounting Firm has 100 workers and 90 computers and currently serves 200 households. If Reed adds another accountant to his staff, he can serve 220 households. What does the law of diminishing marginal returns predict if he adds two more accountants?

Question

Quizplus · Accepted Answer

The law of diminishing marginal returns states that as more units of a variable input (like labor) are added to fixed amounts of other inputs (like capital), the additional output from each new unit of input will eventually decrease. Since adding the first accountant increases the number of households served by 20, adding a second and third accountant is likely to result in less than a 20 household increase per accountant due to the fixed number of computers (capital).

Reed's Accounting Firm Has 100 Workers and 90 Computers and Currently