Indicate whether the following statements are true or false, and explain your an
ID: 1090693 • Letter: I
Question
Indicate whether the following statements are true or false, and explain your answers:
a. When marginal product reaches its maximum, average product is also at its maximum.
b. When marginal product is less than average product, then it must be that average product is declining.
c. The law of diminishing marginal returns states that increases in the variable input reduce the total product.
d. A firm with one worker can produce 30 units of a product that sells for $4 per unit, but the same firm with two workers can produce 70 units of the same product. The marginal revenue product of the second worker is $400.
e. A firm can maximize profit in Stages I or II of production, but not Stage III.
Explanation / Answer
a. When marginal product reaches its maximum, average product is also at its maximum.
false,when MP reaches its maximum, AP curve lies below the MP curve because it is the average of TP and MP is the net addition to TP and in initial stage TP rises at increasing rate.
b. When marginal product is less than average product, then it must be that average product is declining.
true, because at that point of out put TP increases at a diminishing rate and decreases due to fall in MP, so the AP also decreases
c. The law of diminishing marginal returns states that increases in the variable input reduce the total product.
false, 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,
in simple words in diminishing marginal return adition to variable factor will increase the TP at diminishing rate and reaches to maximum but never reduce the TP in this stage.
d. A firm with one worker can produce 30 units of a product that sells for $4 per unit, but the same firm with two workers can produce 70 units of the same product. The marginal revenue product of the second worker is $400.
true, in the initial stage if we increase the variable factor that is worker the MP will increases and the TP will rises at increasing rate this is known as increasing return to factor.and this is because of fuller utilisation of fixed factors.
e. A firm can maximize profit in Stages I or II of production, but not Stage III.
true, because in stage III the firm experience negative return to factor due to over utilisation of fixed factors, hence the net addition or MP will be negative which will reduce the total product and the firm will experience negative return.