Economic Slide Questions
1) You are an employer seeking to fill a vacant position on an assembly line. * Are you more concerned with the average product of labour or the marginal product of labour for the last person hired? * If you observe that your average product is just beginning to decline, should you hire any more workers? * What does this situation imply about the marginal product of your last worker hired? The point at which the average product begins to decline is the point where average product is equal to marginal product. As more workers are used beyond this point, both average product and marginal product decline. However, marginal product is still positive, so total product continues to increase. Thus, it may still be profitable to hire another worker. In filling a vacant position, you should be concerned with the marginal product of the last worker hired, because the marginal product measures the effect on output, or total product, or hiring another worker. This in turn determines the additional revenue generated by hiring another worker, which should then be compared to the cost of hiring the additional worker. 2) Explain the term "Marginal Rate of Technical Substitution." What does an MRTS=4 mean? MRTS is the amount by which the quantity of one input can be reduced when the other input is increased by one unit, while maintaining the same level of output. If the MRTS is 4, then one input can be reduced by 4 units, while the other input is increased by one unit and output remains the same. 3) Is it possible to have diminishing returns to a single factor of production and constant returns to scale at the same time? Diminishing returns and returns to scale are completely different, so it is quite possible to have diminishing returns to say, labour and constant returns to scale. Diminishing returns to a single factor occurs because all other inputs are fixed. Thus, as more and more of the variable factor is used the additions to output...
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