Answer to Question #324041 in Macroeconomics for Hes

Question

4. “If it were not for the law of diminishing returns, a firm’s average cost and average variable

cost would not increase in the short run.” Do you agree with this statement? Explain.

Answer 1

In the short run, the law of diminishing returns states that as we add more units of a variable input to fixed amounts of land and capital, the change in total output will at first rise and then fall. Diminishing returns to labour occurs when marginal product of labour starts to fall. This means that total output will be increasing at a decreasing rate. This is so true

The marginal cost of supplying an extra unit of output is linked with the marginal productivity of labour. The law of diminishing returns implies that marginal cost will rise as output increases. Eventually, rising marginal cost will lead to a rise in average total cost.