Questions on Microeconomics

1235 Words5 Pages
Microeconomics Question 1: Explain and illustrate with diagrams the differences between diminishing marginal returns and decreasing economies of scale and cite causes and examples. Diminishing returns is the decrease in the marginal (per-unit) output of a production process as the amount of a single factor of production is increased, while the amounts of all other factors of production stay constant. The law of diminishing returns states that in all productive processes, adding more of one factor of production, while holding all others constant, will at some point yield lower per-unit returns. It implies that there is an optimal number of any factor of production. Dimishing returns to scale measures output according to the total scale of production, the common level of all factors of production. For example, if all factors of production are increased by two, an two-fold increase in total output would be considered a constant return to scale, while anything less would be a decreasing return to scale and anything higher an increasing return to scale. Marginal returns measure changes in output according resulting from changes in individual factors of production, whereas returns to scale measure changes in output resulting from changes in all factors of production. For example, if a car company decides to hire more workers in order to increase production, it would be only be increasing one factor of production, labor, in order to do so. The additional worker's effect
Open Document