Question

A toy manufacturing company has the following output figures per each number of workers employed, as shown in the table below. Compute the short-run average and marginal products for each worker.

Number of workers	Output	Average product	Marginal product
1	1 200
2	2 500
3	3 780
4	4 400
5	4 800

1.2 Based on your calculations in 1.1, at what number of workers will diminishing returns start to set in? Explain your answer.

1.3 Distinguish between cardinal and ordinal utility. Use examples to aid your explanations. (6)

Answer 1

1.1

Marginal product is the increase in the output due to additional increase in input. Average product is computed by dividing ouput by number of units of input.

Number of workers	Output	Average product	Marginal product
1	1200	1200
2	2500	1250	1300
3	3780	1260	1280
4	4400	1100	620
5	4800	960	400

1.2 Diminishing returns is the decrease in the marginal (incremental) output of a production process as we increase one input keeping other things constant.

Diminishing returns start when marginal product of labor starts to fall. The marginal product is falling when we employ 3 workers.

1.3

1. Cardinal utility is the utility wherein the satisfaction derived by the consumers from the consumption can be measured numerically.

For example, John says that pizza gives him 70 utils of satisfaction whereas biscuit gives only 40 utils.

Utility is measured in utils in this approach. However, this method is less practical.

2.   Ordinal utility states that the satisfaction which a consumer derives from the consumption of product that cannot be measured numerically.

For example, John says that he gets more satisfaction from Pizzas as compared to the biscuits.

Here, preferences are ranked as we can not measure the utility and this method is more realistic.