The statement is correct and as a manager you should not higher any additional worker. Diminishing of returns is a production stage that reflects on the changes of total output as the number of new workers increases. The marginal product of a newly hired employee will absolutely be less than the marginal product of the previous employee and hence additional of more labor should be avoided. A manager should not employee another worker due to solely causing diminishing returns. The law of diminishing marginal product outlines that as long as the marginal product does not become negative, it will be wise that a manager hire beyond the initial diminishing number. Example: Suppose a firm produces 1000 units with 10 laborers, remember the main objective of any firm is to maximize revenue, the management may opts to hire more workers to increase output which will lead to an increase in profit but if the contribution of 11^th worker will lead to a decrease in output, then it will only be important to employ enough employees who maximize the output without causing the marginal product to diminish.
CHAPTER 9. APPLIED PROBLEM TWO, SOLUTION.
Largo Publishing House is not making the optimal choice on input amounts. This is due to the fact that there is underestimation of printers employed. A simple calculation can prove this. If the last printer can add 20 books to the total output and press is adding 1000 books, if you take (1000/2 = 50). This shows that fifty (50) printers can be used to do the work of one printing press machine hence the publishing house will be saving $ 4000.
CHAPTER 9. APPLIED PROBLEM FOUR, SOLUTION.
a) The MorTex Company assembles Garments using both hands and textile machines.
Total labor per day costs $50. Marginal productivity of labor i.e. MPL = 200. .The firm is capable of assembling 5400 units per day.
Therefore for the company to produce 5400 units of Garments, 27 labors is required. Hence each additional laborer can produce 200 extra units per day.
Total cost per day when the company is producing using hands will be (27*50=$1350)
Suppose the company installs’ the machine then, 1 machine can produce 1800 units of .output per day.
The remaining 3600 units (5400 -1800= 3600) should be produced with the help of labors.
As the marginal productivity of labor is 200 units, 18 units of labor will be needed to produce 3600 units. In this case total cost of production will be,
T.C = 18*50+1*600= $1500. This indicates that, if the firm wants to install one machine, then it will be forced to fire 9 labors. .The total cost of 9 labors is (9*50=$450) while the
cost of one machine is $600.This indicates that the company should not install the textile machine since its total cost overweight’s hand labor cost which is $1350 compared to machine cost which amounts to $1500. i.e. ($1500 >.$1350).
b) In the event that the strike goes on, the total labor cost per day will be now $100 and MPL = 200.The total cost to produce 5400 units per day when applying hands will be, $(100*5400/2t00=2700).
The total cost of producing 5400 units when the textile machine is installed will be $((18*100) + (1*600) =2400).
Therefore the firm should install the textile machine if the organized strike succeeds.
1. Maurice, S Charles | Thomas, Christopher R – Ed. (2002). Managerial economics: Boston: McGraw-Hill. 761p. 38.