Question

GM announced the shutdown of several major plants and the exiting of the firm from specific...

GM announced the shutdown of several major plants and the exiting of the firm from specific markets in November 2018.  We might suspect that...  

A. The price earned on these GM products exceeded the wages spent on workers.  

B. The price earned on these GM products exceeded GM's average variable cost.

C. GM was benefiting exclusively from economies of scale.  
D.

GM was suffering exclusively from diminishing marginal product of labor.
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Homework Answers

Answer #1

Its answer is D

Explanation:

Options A,B AND C can be easily ruled out since in these conditions no firm will shut down..A firm shuts down when it is not able to cover even its average variable cost.

In option D ,diminishing marginal productivity of labor means output produced by each additional worker continues to decrease.Lower productivity implies higher requirement of labor to fulfill market demand which implies higher costs for the firm which in turn implies higher variable cost .Price may be lower than average variable cost and therefore GM decided to shut down several plants.

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