2. The table below shows the total production of a firm as the quantity of labor

Question

2. The table below shows the total production of a firm as the quantity of labor employed increases. The quantities of all other resources employed are constant. Compute the marginal and average products and enter them in the table.
Inputs of labor Total product Marginal product of labor Average product of labor
0 0 — —
1 40 _____ _____
2 100 _____ _____
3 165 _____ _____
4 200 _____ _____
5 225 _____ _____
6 240 _____ _____
7 245 _____ _____
8 240 _____ _____

(a) At what levels are there increasing returns to labor and at what levels are there decreasing returns to labor?
(b) Describe the relationship between the total product and marginal product.
(c) Describe the relationship bettween marginal and average product.

Explanation / Answer

Marginal units of lab average tot. product product of lab prod of labor 0 0 1 40 40 40 2 100 60 50 3 165 65 55 4 200 35 50 5 225 25 45 6 240 15 40 7 245 5 35 8 240 –5 30 (a) There are increasing returns to labor through the third worker hired. Decreasing returns to labor set in with the fourth worker. (b) Where total product increases at an increasing rate, marginal product rises (from 0 to 65). Where total product is increasing at a decreasing rate, marginal product is positive but falling (from 65 to 5). Where total product declines, marginal product is negative from 5 to –5. (c) Where marginal product is greater than average product, average product will rise. Where marginal product is less than average product, average product will fall. Marginal product intersects average product at maximum average product.

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