Question

Assuming diminishing marginal product of additional workers and diminishing marginal product of additional hours-per-worker, how would a profit-maximizing firm adjust its mix of workers (L) and hours-per-worker (H) in response to: (a) A new user-friendly computer system that reduces training time required by one-half? (b) New legislation requiring full-time workers to receive employer-sponsored health insurance?

Answer 1

Answer : The law of diminishing marginal returns states that, an additional factor of production results in smaller increases in output at some point.

In our case, a factory employs workers to manufacture its products, and, at some point, the company operates at an optimal level. With other production factors constant, adding additional workers beyond this optimal level will result in less efficient operations.

At a certain point, using an additional factor of production causes a fairly smaller increase in output.

• Diminishing returns happen in the short run when one factor is fixed or static.
• If the variable factor of production is increased (e.g. labour), Then at a point it will become less productive and there will finally be a decreasing marginal.

In our case, For profit-maximizing the firm adjusts its mix of workers (L) and hours-per-worker (H) in response to: workers (L) and hours-per-worker (H)

(a) A new user-friendly computer system that reduces training time required by one-half?

· Assume TP is the total output produced by workers

· And MP is output produced by an extra worker

· The workers be (L) and hours per worker be H

• The Marginal hours to be trained will be the half but the output is will remain constant. Cost of training will be reduced but its profit is just for short period of time. This law only applies in the short run since in the long run all factors are variable or inconstant.

Thus a new user-friendly computer system that reduces training time required by one-half will be profit-maximizing to the firm only when it’s revised over a short period of time. Else the profit in hours saved will be neutralized

(b) New legislation requiring full-time workers to receive employer-sponsored health insurance?

The expected utility with insurance is greater because the marginal utility in the event of the loss is greater than if no loss occur.

Assume that Worker (L) employer-sponsored health insurance, this will boast the Workers Work behaviour as it’s assurance to recover fully from a potential financial loss due to illness. However this won’t help then in fixing up the losses or making profit.

The law of diminishing returns relates in the short run as only there are some factor fixed. The basis of the law is that resources are not perfect substitutes. To get an bonus unit of output, only the adjustable input can be increased. But the adjustable input is an unsatisfactory substitute for the fixed input so we obtain fewer and fewer output for each additional unit of the variable input. Thus marginal product must fall.