Answer to Question #224311 in Macroeconomics for Natty Des

Question

Given the following short run production function schedule of a firm where we have only one
variable input, (L), and one fixed input, land. Answer the following questions
Labor (L) 0 1 2 3 4 5 6 7 8
Total product(TP) 0 3 7 12 16 18 19 19 16
A. Identify the three stages of production in table form and graphically
B. When the law of diminishing marginal returns does starts to operate?
C. At what stage of production should a rational producer produce? Why?
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Answer 1

Solution:

A.). The three stages of production are represented by the slopes, shapes, and interrelationships of the total, marginal and average product curve.

Stage one is the period of most growth in a company's production. In this period, each additional variable input will produce more products. It signifies an increasing marginal return and all curves are rising. In stage one, the average product is positive and increasing. All three curves are increasing and positive in this stage.

Stage two is the period where the law of diminishing returns kicks in and the marginal returns start to decrease. Each additional variable input will still produce additional units but at a decreasing rate. In this stage, the total product curve is still rising, while the average and marginal product curve both starts to decrease.

Stage three is where the marginal returns start to turn negative. When one unit is added to labor, it leads to lower production. In this stage, the total product curve starts to drop down, the average product continues its descent and the marginal product curve becomes negative.

This is displayed by the below table and graph:

B.). The law of diminishing returns starts to occur at stage two, where the average product and marginal product curve starts to decrease and the total product rising at a diminishing rate.

C.). A rational producer should seek to produce at stage two. This is where both the marginal product and average product of labor are diminishing. At this stage, the producer will decide to produce depending on the prices of factors. A producer can, therefore, always increase their output by reducing the units of the variable factors. In other words, stage two represents the range of rational production decisions.