Question

Suppose that a tailor working alone can make 2 suits per month; assuming that the business continues to hire tailors to work in the same shop, 2 tailors can produce 5 suits, 3 tailors can produce 10 suits, 4 tailors can produce 14 suits, 5 tailors can produce 17 suits, and 6 tailors can produce 19 suits.

a.   Organize this information in a table and find the marginal product of labour (MPL).
b.   When does the law of diminishing returns begin to operate? Why do you have increasing returns up to that point?
c.   Why do diminishing returns eventually set in?

Answer 1

a)

Date I lotah Number of workers/failors L Marginal product ATP/AL product AR 2 5 10 2. 3. 4 5 6 2 (5-2)/1 = 3 20-5/1=5 14-10/1 = 4 (17-14/1 = 3 (19-17) /1 = 2 17 19 2 MPE 5 3 2 2 can If you want 4,32 deorganise compact the table into a more form Number of dailors notal product Marginal product 2 2 5 10. 3 4 5 2 3 5 A 3. 2 14. 17. 19 6

b) The law of diminishing returns begins from the movement 4 tailors are hired. Till that point , there is Increasing returns because increasing the labour input by one more unit ( hiring one more tailor) leads to an increase in marginal product or we can say that change in output is proportionately higher than the change in input.

( For example, when 1 tailor is employed , marginal product is 2

*When 2 tailors are employed , marginal product is 3

* When 3 tailors are employed, marginal product is 5

You can see that till this point MP is increasing- 2, 3,5 . Therefore, there is Increasing returns to scale.)

c) Diminishing returns eventually sets in because adding one more labour input leads to a decrease in marginal product or we can say that change in output is proportionately less than the change in input.

( For example, when four tailors are hired , marginal product is 4 which is less than 5 ( earlier marginal product). When five tailors are hired , marginal product is 3 which is less than 4. When six labourers are hired, marginal product is 2.

Thus, you can see that MP is declining - 4,3,2. Therefore, there is Increasing returns to scale.)