If Firm 1 has a higher average product of labor than Firm 2, can we say that Fir
ID: 1165892 • Letter: I
Question
If Firm 1 has a higher average product of labor than Firm 2, can we say that Firm 1 is more productive in the sense that it can produce more output from a given amount of inputs? Hint: Firm 1 and Firm 2 may be using different amounts of labor for this comparison) Compared to Firm 2, Firm 1 O A. is less productive because output and average product are inversely related. O B. is more productive because output increases proportionally with labor C. might not be more productive because the marginal and average products of labor are equal. O D. might not be more productive because labor exhibits diminishing returns. O E. is more productive because labor's average product is increasing with laborExplanation / Answer
Correct Answer:
D
The output level decreases with the increase in labor. So, law of diminishing marginal return sets in. In a given case, it may happen that Firm 1 has less number of labors, showing higher average product, and firm 2 has more number of labors, showing lower average product, though both the firms follow the same productivity pattern.