Answer to Question #272645 in Microeconomics for Anu

Question

a) Compare diminishing marginal returns and diseconomies of scale? 

b) Use a numerical example to show that increasing returns to scale can co-exist with diminishing marginal return. Make sure you explain how your example answers the question. 

c) What are the two components of a firm’s cost in the short run, and what are their definitions? 

d) How do the marginal and average products of labour affect a firm's marginal and average variable costs in the short run? 

e) What does a firm's short-run total product curve show and what is its significance? 

Answer 1

(a)

Diminishing marginal returns looks at how the output of production reduces as one input is increased, while other inputs are left constant, whereas diseconomies of scale occurs when the per unit cost rises as output is increased.

Diminishing marginal returns applies only in the short run when atleast one factor is fixed, this explains why marginal cost increases, whereas diseconomies of scale applies in the long run when all factors are variable, this explains why average cost increases.

(b)

Whenever the specified number of input factors is merged with output computational input values, the law of diminishing production implies that now the overall production would increase at a higher speed in the beginning, then at a steady rate, but ultimately, the rate will start declining. By stating the returns to scale calculate the change in productivity from increasing all inputs of production in the long run. When a certain number of parameter elements is merged with outputs computation input parameters, then the rule of diminishing productivity indicates that overall production will increase at a quicker speed at the outset, then at a consistent speed, then eventually at a slightly slower pace. The scale of production is indeed a formula that calculates the increase in productivity over time as part of expanding all factors of production.

For instance, if a shampoo manufacturer doubles its production function input (labor or capital) but gets only a 30% increase in total output, then it can be said to have experienced decreasing returns to scale. If the same manufacturer ends up doubling its total output, then it has achieved constant returns to scale. If the output increased by 140%, then the manufacturer experienced increasing returns to scale.

(c)

• Total fixed cost - refers to the sum of all consistent, non-variable expenses that a firm must pay.
• Total variable cost - refers to the expenses that change in relation to the total production during a given period of time.

(d)

Marginal cost is the increase in total cost resulting from a one unit increase in output. The average fixed cost curve is downward sloping because the fixed costs are spread over output. As output increases, the average fixed cost decreases. Marginal Cost is a reflection of marginal product and diminishing returns. When diminishing returns begin, the marginal cost will begin its rise. The marginal cost is related to average variable cost and average total cost. These costs will fall as long as the marginal cost is less than either average cost. As soon as the marginal cost rises above the average cost, the average cost will begin to rise.

(e)

A total product curve shows the quantities of output that can be combined from different amounts of variable factor of production, assuming other factors of production are fixed. The total product curve is significant such that it explains how the total output varies with marginal product. As marginal product increases, total product increases at an increasing rate , when marginal product declines but remains positive, total product increases but at a diminishing rate, when the marginal product is declining and negative, total product declines. When marginal product is equal to zero, total product reaches its maximum.