Question

What is the law of diminishing returns? Use the following data to demonstrate the three stage production function :

Inputs of variable resource 1 2 3 4 5 6 7 8 9 Total Output 10 25 37 47 55 60 63 63 62

a. Calculate Average Product and Marginal Product. b. Using above information draw a two panel diagram to illustrate the stages of production. c. Which stage would represent optimum production?

Answer 1

The law of diminishing returns states that continuous increases of one input factor while holding the other input factors fixed will lead to a decrease in the per unit output of the variable input factor.

a.

L 1 2 3 4 5 6 7 8 9

Q 10 25 37 47 55 60 63 63 62

AP 10 12.5 12.33 11.75 11 10 9 7.88 6.89

MP - 15 12 10 8 5 3 0 -1.

b. The three stages are: increasing returns, diminishing returns and negative returns.

c. Increasing returns stage would represent optimum production.