Question

(Pizzeria would likely also experience diminishing returns to labor as more workers are added to work in the shop (maybe not with the 2nd or 3rd worker, but almost certainly at some point). To make the analysis a bit simpler assume the Pizzeria just does take out business and only sells Pizzas.)

Explain what it means to say the Pizzeria is experiencing diminishing returns to labor as workers are added.

- Explain why this might be true (i.e., consider what the Pizzeria does to make and sell the pizzas and explain why adding more workers to this process would eventually result in diminishing returns to labor).

- Explain what will happen to the marginal cost of making the pizzas once diminishing returns to labor kicks in.

Answer 1

Diminishing returns to labor indicates that the marginal productivity of labour declines as more and more labor unit is added. Pizzeria is experiencing diminishing returns to labor as workers are added. this implies that the number of pizzas produced by each additional worker hired, declines as more and more workers are employed.

this can be true because the pizzeria is using the same set of machines equipment and tools to produce pizzas. Initially when there are only few workers, marginal productivity may be increasing, but due to congestion and coordination problems, and that the increasingly higher number of workers are using the same machines, their marginal productivity decreases.

The marginal cost of making pizzas will increase because each additional labor unit is now producing lower and lower number of pizzas so the additional cost of producing one pizza goes on increasing.