Theory question 106
Theory of Production(a) State the law of diminishing returns.
(b) What is (i) marginal product, (ii) average product?
(c) Explain any three factors that determine the size of firms.
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(a) If more and more units of a variable factor are added to a fixed factor, the marginal product of the variable factor will at first rise but will eventually fall.
(b)(i) Marginal product: the change in total product from employing one more unit of the variable factor (ΔTP/ΔL).
(ii) Average product: total product divided by the number of units of the variable factor (TP/L).
(c) Any three: size of the market; availability of capital; managerial ability of the entrepreneur; nature of the product; government policy; availability of raw materials and labour; level of technology; type of business organisation.
Marginal product is the extra output; average product is output per unit of the variable factor.