1. Explain why the principle of diminishing marginal productivity only occurs in the short-run
2. Explain the relationship between the economic concept of diminishing marginal productivity and the principle of increasing marginal costs?
3. Explain the difference between a short-run production decision and a long-run production decision.
Problems and Exercises:
1. Complete the production table below and answer the following questions
a. At which level of employment does diminishing marginal productivity begin?
b. At which level of employment does diminishing absolute productivity begin?
2. Suppose you are opening up a pizza restaurant. You decide to open up your restaurant at the Irvine Spectrum. Before you begin to sell pizza's, you must first set up your restaurant. To do this you need to purchase the following:
Rent: $1,000 per month
Insurance: $300 per month
Cash Registers (2): $750 each
Pizza Oven: $1500
Furniture/Interior Design: $3000
Neon Sign/Billboard: $1000
For simplicity purposes, your only variable input is labor, which you will hire for $1,500 per month. (in actuality, any cost that increases as your production increases will be considered variable costs. Other variable costs may include ingredients, electric and gas bills.
a. Use the information above to complete the table below for your restaurant
b. At what level of output does diminishing marginal productivity begin? ____________
c. At what point to marginal costs begin to increase? ______________________________
d. Suppose you can sell pizzas for $15 each. How much profit would make if you sell 3300 pizzas? ___________________
3. Complete the table below and answer the corresponding questions.
a. Is this a short-run or a long-run cost table? How do you know?