Topics: Economics, Microeconomics, Marginal cost Pages: 24 (1899 words) Published: September 29, 2013

Q1) Explain (using example) the law of diminishing marginal productivity (DMP). Also, explain the difference between the law of DMP and law of returns to scale............................................................. 3 Q2) Explain how profit maximizing output is determined in a .............................................................. 9 a)

Perfect competitive market ............................................................................................................. 9

b)

Monopoly ........................................................................................................................................ 9

c)

Monopolistic market ....................................................................................................................... 9

2

Q1) Explain (using example) the law of diminishing marginal productivity (DMP). Also, explain the difference between the law of DMP and law of returns to scale.
A. The law of diminishing marginal productivity states that if one input in the production of the commodity is increased while other inputs are held fixed, a point will eventually be reached at which additions of the input yield progressively small or diminishing increase in output.

The production function is a mathematical expression which relates the quantity of factor inputs to the quantity of outputs that result in three measures total product, marginal product and average product.

The law of DMP is reflected in the shapes and slopes of the total product, marginal product and average product curve.
For e.g. consider the production of Super Deluxe Texmex gargantuan tacos. The table represents the hourly production of G tacos as Waldo’s Texmex taco world employs different quantities of labour, the key variable input for short run taco production. Labour

Total Product

Marginal Product

0

0

-

1

20

20

2

50

20

3

75

25

4

95

20

5

110

15

6

120

10

7

125

5

8

125

0

9

120

-5

10

110

-10

3

For the 1st two workers marginal product actually increases. This reflects increasing marginal returns and commonly results when the variable input is able to make increasingly effective use of a given fixed input. For the 3rd worker on, marginal product decreases. This reflects decreasing marginal returns and the law of diminishing marginal productivity.

The graph represents the three product curves that form the foundation of short-run production analysis:

Total product curve- the curve labelled TP
in the diagram is the TPC. The total no. of
Texmex G tacos produced per hour for a
given amount of labour. The increasingly
flatter slope of the total product is an
attribute to the law of diminishing
marginal productivity.

Marginal product curve- the MP curve is
the Marginal product curve. The MP
curve indicates how the total production
of Texmex G tacos changes when an extra
worker is hired. The negatively sloped
portion of the MP curve is a direct
embodiment of the law of diminishing
marginal productivity.

Average product curve-the average product curve, labelled APC indicates the average No. of Texmex G tacos produced by Waldo’s workers. The negatively sloped portion of the average product curve is indirectly caused by the law of diminishing marginal productivity.

Diminishing marginal productivity could be explained in a better way with the help of few examples. The use of fertilizers in agriculture. Increased application of fertilizers augments agricultural production, but only up to a certain extent. Once that point is reached, increased application of fertilizers no longer increases agricultural output, rather agricultural output starts declining. Once the maximum amount of production is reached, the law of DMP starts operating and marginal...