Theory question 101
Theory of ProductionTable 1 below shows the number of workers engaged by an agricultural firm over a period of time. Study it and answer the questions that follow.
Number of workers | Total product | Marginal product | Average Product
0 | 0 | 0 | 0
1 | 20 | 20 | 20
2 | 50 | 30 | Z
3 | 70 | 20 | 23.3
4 | 80 | Y | 20
5 | 80 | 0 | 16
6 | X | −9.8 | 11.7
(a) Calculate the values of X, Y and Z.
(b) At what level of employment of labour does the firm experience: (i) increasing returns; (ii) decreasing returns; (iii) negative returns?
(c) State the law of diminishing returns.
(d)(i) On a graph sheet, draw the total product and marginal product curves. (ii) State any two relationship between the two curves in (d)(i) above.
Show the model answer
(a) X = TP5 + MP6 = 80 − 9.8 = 70.2 (or AP × 6 = 11.7 × 6 = 70.2); Y = 80 − 70 = 10; Z = 50 ÷ 2 = 25
(b)(i) Increasing returns: from the 1st to the 2nd worker (MP rises from 20 to 30).
(ii) Decreasing returns: 3rd and 4th workers (MP falls from 30 to 20 to 10 but is positive).
(iii) Negative returns: the 6th worker (MP = −9.8).
(c) If more and more units of a variable factor are added to a fixed factor, the marginal product will at first rise but will eventually fall (and may become negative).
(d)(i) Workers on the horizontal axis, product on the vertical axis; plot TP (0, 20, 50, 70, 80, 80, 70.2) and MP (20, 30, 20, 10, 0, −9.8); label both curves.
(ii) Any two: when MP is rising, TP rises at an increasing rate; when MP is falling but positive, TP rises at a decreasing rate; when MP is zero, TP is at its maximum; when MP is negative, TP falls.
MP = change in TP; AP = TP ÷ workers.