Answer to Question #209948 in Microeconomics for jean marie

Question

With the help of a well labeled diagram explain the three stages of productions. Why should a firm not operate in the first and third stages?

Answer 1

stage I

in this stage, if variable input is added to the fixed input, the marginal product of the variable increases. The average product increases because the marginal product is greater.

stage II

This stage is characterized by decreasing positive marginal returns. The law of diminishing returns drives it when a variable input is added to a fixed input, the marginal product of the variable increases.

stage III

Illustrates negative marginal returns. The diminishing law of marginal returns leads to a negative decreasing marginal product.

Firms should operate in stage II because optimal utilization of factors is realized.

In stage I, it would be inefficient for firms to operate since there is still room for increased output and hence high profit.

In stage III, capital is overutilized/overburdened by large units of labor.