Question

When does the Law of Diminishing Marginal Returns kick in? Explain why.

Answer 1

Solution:

Diminishing marginal product is a phenomena where marginal productivity of labour goes on falling when more and more units of labour are employed. The tendency for the marginal product to fall stems out from the fact that as more and more labour units are employed congestion increases and each labour unit gets a little of fixed capital. With limited and capital an increasing number of workers, the productivity is likely to fall.

There are exceptions as well. In the initial stage of increasing returns to a factor, marginal product actually increases because fixed amount of capital is relatively higher for smaller number of labour units so that each labour unit adds more to the output till decreasing returns start setting in.