Question

Question 3

“To some extent, the rising of both short-run and long-run average cost curves is related to labor issues.” Can we conclude that after a certain production period, a firm’s pool of labor becomes unproductive? Justify by means of relevant laws/theories. [10 marks]

Answer 1

Answer - The rising short term and long term average cost is related to the principle of diminishing returns to factor and diminishing returns to scale. The diminishing returns to factor occur in the short run whereas the other occurs in long run. As per this theory, as we go on adding more and more inputs , the output first rises at increasing rate , then rises with dimishing rate and after reaching the maximum , it starts falling. Thus this can be said that as we go on adding more and more labor to the production , after the certain level of output , the productivity starts declining and hence the costs start rising. This leads to the upward slope of the cost curves. This happens in both short and long term.