Question

6. Explain what diminishing marginal return is. Discuss if you can use the diminishing marginal return concept when you make your expenditure decisions. Give a specific example.

Answer 1

Law of diminishing return states that when the output level is optimum, adding another unit of input keeping all of the other inputs same will not add to output or productivity of the activity. For example company A produces shoes at 200 shoes per day capacity with 50 working labors and capital invested $50,000 which is being used as machines. Keeping capital constant if A increases workers from 50 to 60 the production of shoes increases from 200 to 220 shoes a day but then increasing 10 more labor increases production from 220 to 223 shoes per day. Now in this situation 60 labors and 220 shoes is the optimum productivity for A and increasing another input (labor) will give less results which further will give decreasing results like increase of 70 labors to 80 will result in 223 shoes only and that additional 10 labor input is extra cost.