Answer to Question #35955 in Microeconomics for sugunah

Question

L Q MPP TVC TC MC ATC
0 0 0 RM 0 RM 120 --- 0
1 60 60 60 180 1 3
2 150 90 120 240 0.67 1.6
3 210 60 180 300 1 1.43
4 240 30 240 360 2 1.5
5 260 20 300 420 3 1.61

What level of labour is associated with the point of diminishing returns? Explain your answer.

Answer 1

The law of diminishing returns (also law of diminishing marginal returns or law of increasing relative cost) states that in all productive processes, adding more of one factor of production, while holding all others constant ("ceteris paribus"), will at some point yield lower per-unit returns. The law of diminishing returns does not imply that adding more of a factor will decrease the total production, a condition known as negative returns, though in fact this is common.