Question

1. Fill in the blanks in the table below (show solutions)

Trucks	Labor	Total Product (TP)	APL	MPL
2	0	0	---	---
2	1	75
2	2		100
2	3			100
2	4	380
2	5			50
2	6		75

Is this a short-run or a long-run production process? Briefly explain.

At what point does diminishing returns set in? Specifically in the context of this problem, why is there DMR?

2. Is it possible that diminishing marginal returns will set in after the very first unit of labor is employed? Illustrate the total product (TP_L), marginal product (MP_L), and average product (AP_L) in this case. Explain the shape of your graphs.
3. If the TP_L curve is a straight line through the origin, what do the AP_L and MP_L curves look like? Illustrate. Would the TP_L curve ever have this shape? Why or why not?
4. Which is more relevant to the firm when making decisions, the average product or the marginal product of a new hire? Explain.

Answer 1

As truck quantity is constant at 2, so there is only one factor variable ,so this a short run production process.

Marginal product of labour Increases from labour till labour unit 2. From labour unit 3, marginal product of labour start decreasing.so from labour unit 3 diminishing returns set in.

The DMR is because of constant number of truck which leads to over utilization of truck and productivity Decreases. And also lower number of truck make under utilization of labour ,so that also Decreases productivity.and together these two generate DMR.

Yes ,it is possible .If truck fixed quantity is very low for example 0.5.,The DMR will set in after very first unit.

MPL and APL curve will be strictly downward sloping.

And TPL curve will be concave from origin .

IF TPL is a straight line then MPL and APL curve would be straight horizontal line which shows fixed MPL and APL.

Yes,In long run when both factors would be variable then constant returns to scale leads to straight line TPL

Marginal product is more relevant for firm for hiring labour.

The firm decision of hiring labour is based on ,

Marginal revenue product=wage

And marginal revenue product=marginal product* price .

So marginal product is more relevant than average product