Question

True False-Ambiguous and Explain why 4. The data demonstrate economies of scale and the law of diminishing returns. L Q 0 0 3 100 5 200 6 300 8 400 12 500

Answer 1

Answer: Ambiguous

To find the economies of scale, we need to know the firm's average total cost(ATC) of production along with the amount of output, which is already shown in the table. If the ATC decreases with the increase of output, then the firm experiences the economies of scale. Here, the ATC is not given. So, we can't say about the economies of scale.

The law of diminishing returns means, the decreasing marginal productivity of factor, here labor, keeping at least one of the factors of production constant. The marginal productivity of labor shows the change in quantity of output for the change in one additional unit of labor. From the table, we see that the firm is increasing the labor randomly but output increases at a same proportion whatever be the number of labor used. So the marginal returns of labor may decrease or increase in entire production, which we do not know because the marginal returns of labor shows the return from employing an additional unit of labor.

Thus, from the given data, it is ambiguous to know whether the firm experiences the economies of scale or the diminishing returns.

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