Question

3. You manage one department in a large corporation. Two years ago, you had 20 workers and produced 40.000 units. The company allocated 10 more workers to your department last year, and output increased to 45,000. You just received a memo from your boss indicating that he is very concerned about the 500-unit fall in the average productivity of your workers. How can you defend yourself? 4. What is the difference between marginal product and returns to scale? Explain why it is possible to have diminishing returns to a single factor of production (e.g. labor) and constant returns to scale at the same time.

Answer 1

3.

Average Productivity (two years ago)  = 40000/20 =  2000 units per worker

Average productivity (last year) = 45000/30 = 1500 units per worker

There is apparent indication that average productivity has decreased, but it has a valid defense in the form of diminishing marginal product of labor (diminishing return of labor) when labor as a factor of production is increased, while capital is remained as fixed. So, it is the decrease in marginal productivity  that is showing in the result of average productivity.

The decrease in marginal productivity takes place, when capital remains fixed and more workers are deployed using the same capital and technology resources. Hence, a manager should focus to bring more capital and or new technology to improve the marginal productivity, and subsequent rise in average productivity.

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4.

Marginal product tells the additional units produced by deploying one more units of input factor of production while other factors of production are fixed, but return to scale is measured when all factors of production are variable in nature. Hence, marginal product is generally used in short run, but return to scale is used in the long run.

Each long run phenomenon has its own short run phase. So, when only one factor is being varied in a short run, then diminishing return takes place. But, that short run, being the part of one long run horizon, makes all factors to be variable and constant return to scale can take place.