Question

Microeconomics

Marginal Productivity and the Law of Diminishing Marginal Returns

You have recently been hired to manage a movie theater. You observe that there are many customers waiting around the concession area to buy snacks. You also observe that there is only one clerk working the counter. This employee has to do everything from get the popcorn going, stocking condiments and supplies, changing the soda canister when the syrup runs out for fountain drinks, helping customers, fill orders, collect cash, and of course, smile at the customers who have waited lengthy periods of time.

You obtain a report that shows the average sales per weekend night are $500 with one clerk. You decide to hire another clerk for the shift and sales increase to $1,000. You add one more clerk, and sales increase to $1,700. Again, you add another clerk, and sales increase to $1,900. Finally you add one more clerk, and sales increase to $2,000.

1.         Calculate the marginal product associated with each clerk. Draw a table to do this.

2.         At what point did the law of diminishing marginal return become evident?

3.         Why did the marginal product increase as more clerks were added initially?

4.         Why did the marginal product start to diminish?

Answer 1

Answer)

1)

Clerk	1	2	3	4	5
Sales	500	1000	1700	1900	2000
MPl	500	500	700	200	100

This is due to Law of Variable Proportions. According to this law, when only a single variable factor increases i.e. labor, then eventually Marginal Product of Labor declines. Production process has the following three stages -

Stage 1 - Increasing Returns

Stage 2 - Diminishing Returns

Stage 3 - Negative Returns

2) The diminishing marginal return becomes evident at the hiring of the fourth clerk. At this point, the marginal product of labor rises by only 200.So, there is diminishing marginal return. The total product also falls, therefore, marginal product also falls . By increasing only labor, optimum combination of input gets changed.

3) The marginal product increased initially as more clerks were added because every increase in input i.e. labor, output increases more than proportionately by 500,500,700.So, there are increasing marginal returns. The total product first increase, reach a maximum point and then decrease.

4) The marginal product starts to diminish due to the law of diminishing marginal returns. By increasing only labor, optimum combination of input gets changed. So, there are diminishing returns.

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