Question

2. The following diagram illustrates a firm's production function, holding labour constant. Describe what is happening with the marginal product of capital in each of the three indicated sections (a, b, c), and explain what circumstances could cause the marginal product of capital to change in these different ways. (6 marks) Q=F(KL) b

Answer 1

Section a:

In section a, Total Product(TP) increases at an increasing rate. The MP is increasing. This stage of production is called increasing return. In this stage, quantity of labor is much more than quantity of capital. When more and more units of capital is added to work with the labor, which is a fixed factor, is effectively and efficiently utilized. Due to this MP of variable factor,i.e., capital increases.

Section b:

In section b, TP increases at a decreasing rate. MP of capital is decreasing. This stage of production is called decreasing return. In this stage, quantity of variable factor,i.e., capital is more than quantity of fixed factor,i.e., labor. When more and more units of capital is added to work with the labor, total production increases but at a decreasing rate. Due to this MP of variable factor, i.e., capital decreases.

Section c:

In section c, TP decreases. MP of capital is negative. This stage of production is called negative return. In this stage, quantity of variable factor,i.e., capital is much more than quantity of fixed factor,i.e., labor. When more and more units of capital is added to work with the labor, total production decreases. Due to this MP of variable factor,i.e., is negative.