Question

1). Describe the law of eventually diminishing marginal returns. Does this law occur in the short run or in the long run. Why? Will a profit maximizing firm ever operate in the range of diminishing returns. Explain your answer.

Answer 1

Answer

Law of diminishing marginal returns states that when firms increase one input in the production, mrginal product also increases but after a point of time when firms increases one input in production marginal product starts declining. The reason for this is when we continuously increase the inputs, it exceeds the firms capacity and Increament can be done in the limits and according to capacity of the firm. Excess increase in the input leads to over exploitation of assets and machines.

This law is applicable in long run because in short run marginal product increases with the increase in inputs. When firms continue to increase the inputs then it starts decreasing with the passage of time.

Yes, every firm which is operating for a long period of time faces this situation. This phenomenon is universal for any firm operating for a long period of time irrespective of if they are making profit or not. Because in long run performance of machines decline and they become obsolete.