Cost of Production 2 a. Explain the Law of Diminishing Returns and how understan
ID: 1210012 • Letter: C
Question
Cost of Production 2
a. Explain the Law of Diminishing Returns and how understanding that law might help a business manager make better business decisions.
i. State the assumptions and state the definition of the Law of Diminishing Returns.
b. Explain each of the short run production costs, and explain what they might mean to a business manager.
c. Explain how the long run ATC curve is derived and how understanding that concept might help a business manager make better decisions.
1. The definition of ATC
2. Who one would approach deriving the LR ATC.
d. Explain economies of scale, constant returns to scale, and dis-economies of scale and why understanding those concepts might help a business manager improve their decision-making.
Explanation / Answer
Law of diminishing returns says that as the firm go on employing more and more variable factor, the firm in the beginning may experience increasing returns, then there may be constant returns and finally the firm will experience diminishing returns to scale in the long run and diminishing returns to a factor in the short run. The reasons can be overemployment of the variable factors and inefficient capital output ratio. Any manager who wants to run business well will always try not to overemploy the variable factors like labor and avoid a situation where the additional returns or output from an addition variable factor is negative. If the marginal product from an additional labor is negative this means that it is not feasible for the firm to employ that additional labor as it does not add value to the output of the firm.
The assumptions of the law of diminishing returns are as follows: