Question

2). Discuss the relationship between the law of eventually diminishing marginal returns and the marginal cost curve.

Answer 1

Answer:

According to the law of diminishing returns, the additions made to the total product gradually fall as more and more units of a variable factor are employed. This law is applicable in the region where total product rises at a decreasing rate. Marginal cost, on the other side. is the additional cost of producing one more unit.

The two concepts are indirectly related to each other. Marginal cost is the slope of the total cost function. Since fixed cost remains unchanged, marginal cost is actually the slope of the variable cost function. The curvature of the variable cost function suggests that it is concave in shape when total product rises at an increasing rate.

This is the first stage of production where increasing returns to a variable factor are applied. Hence, when there are increasing returns, variable cost is convex, requiring smaller increments in costs. This results in falling marginal cost curve. In the second stage where total product is increasing at decreasing rate, there are diminishing returns.