Question

Consider the following information on employment and total productivity: Employment (L) Total productivity (TP) Marginal productivity (MP) 3 10 units 13 units 5 8 16 units 10 16 units 12 14 units Fill in the column for MP, and discuss the implication of the law of diminishing marginal productivity. (10 points)

Answer 1

Marginal productivity ( MP_{​​​​​L}) is the change in total productivity when one more additional labor is employed. It is the addition to total productivity as a result of employing one more additional employee. It is calculated as-

Marginal productivity= change in total productivity/ change in labor ( employment)

Employment (L)	Total productivity	Marginal productivity
3	10 units	3.33
5	13 units	1.5
8	16 units	1
10	16 units	0
12	14 units	-1

We shall assume that the firm had initially 0 employment and then it hired 3 employees. Hence, when 3 employees are hired,

Marginal productivity= (10-0)/(3-0)

Marginal productivity= 10/3= 3.33

The law of diminishing marginal productivity states that as more and more units of a variable factor are applied to a the given quantity of fixed factor, total productivity ( output) may increase at an increasing rate initially, but eventually it will increase at a diminishing rate.

From the above table of total productivity and marginal productivity we can see that when 3 employees are hired, Marginal productivity increases at an increasing rate, and thereafter it increases but at a decreasing rate upto 8 employees. When 10 employees are hired , marginal productivity is zero indicating that one more additional employee has not resulted in addition to the total productivity( i.e., total productivity is constant). When 12 employees are hired, marginal productivity is negative indicating that this additional employee has resulted in a decrease in the total productivity. As this additional employee has resulted in a decrease in the total productivity, Marginal productivity is negative.