Question

1. describe why total product increases when the marginal product is positive.

2. describe why matginal product and marginal cost are opposites.

3. When MC is greater than ATC, why does ATC increase?

Answer 1

1. Marginal Product is the addition to the total product when an additional unit of input is used. As long as marginal product is increasing, total product increases at an increasing rate. The reasons for the increasing returns are fuller utilization of resources, division of labor and better coordination between the factors. In the initial stages, fixed factor remains underutilized, so an additional unit of the variable factor adds more and more to the total output. Also, additional application of the variable factor makes the workers specialized for different processes of production.

When marginal product starts diminishing but is positive, total product increases at a diminishing rate. This is because marginal product is an addition to the total product, so when marginal product is decreasing, an addition to the total product is decreasing and not the total product as such. Another reasons for the diminishing returns are fixity of the factor, imperfect factor substitutability and poor coordination between the factors. As more and more variable factor is combined with the fixed factor, fixed factor suffers geat wear and tear and loses its efficiency. Also, more and more labor cannot be used in place of capital as labor and capital are imperfect substitutes of each other. Increasing application of the variable factor eventually disturbs the ideal factor ratio.

So, total product increases when marginal product is positive because as soon as marginal product turns negative, it means that there is no addition to the total product or variables factor is negatively contributing o the total product which causes the total product to fall.