Question

1. Short-run production.

a. What is the key feature of short-run production?

b. One key assumption for the short-run production is diminishing returns to labor. Explain what it means, how is Malthus's view regarding population and standard of living relate to this concept? What has Malthus missed when he made the prediction?

c. What does diminishing returns related to the concepts Total Cost , Marginal Cost, Average Variable Cost, Average Fixed Cost, Total Product , Marginal Product, Average Product, etc? Use graphs to show.

d. Evaluate the relevance of this assumption of diminishing returns to labor in modern production.

Answer 1

a) Key features of short run production -

- Some inputs are fixed and some are variables

- Output can be changed by changing the variable inputs

- Exhibit decreasing return to scale

- Last for a year or so

- Entry or exit restricted in this period.

b) Diminishing return to labor implies that with additional increase in units of labor, each successive unit of addition will bring less increase to output than earlier unit. In other words, the marginal product decreases with increase in labor.

Malthus provided in his theory that rate of increase in population is much higher than increase in food production. Thus, the standard of living can not rise permanently. This is an alternative explanation to diminishisng return to labor that with increase in labor they contribute less to output.

Malthus missed an important factor of production that is technology. With advancement of technology even with lesser units of labor, the output rises and it has been shown empirically that with rise in population the output increases more because of advancement in technology.

c) Diminishing return implies that -

Total Cost will is U shaped that is will decrease at irst but when the diminishing return occurs, it will increase at increasing rate

, Marginal Cost at first will drop but after some point it will increase at increasing rate.

Average Variable Cost also U shaped

Total Product will increase but at decreasing rate,

Marginal Product will decrease with every addition in labor unit

Average Product will decrease.