Question: This problem is designed to give you practice in understanding the profound implications of Ricardo's law of diminishing returns and its meaning for economic growth. Pangea can produce the levels of output shown in the table near the end of the problem by varying its labor force (the variable input) working with the following fixed inputs. The fixed inputs are the currently available 36 square miles of arable land and Pangea's existing 14 factories with the machinery and technology they have installed. The actual level of production in the country depends upon how much of the variable input labor is combined with these fixed inputs.
a. Use the data in the table to draw a graph of Pangea's production function. If you can use Excel, input the data beginning in cell A1. Then, highlight it and choose a scatter diagram with lines (measure employment on the horizontal axis, total output on the vertical). Your graph should look like that in Figure 4.1. It clearly illustrates Ricardo's law of eventually diminishing returns. Of course, you can draw this using graphing paper.
b. Show on a separate graph exactly at what level of employment diminishing returns to production begin by drawing a marginal output graph (put employment on the horizontal axis and marginal output on the vertical). You will have to calculate these values in the marginal output column. Remember: marginal output is the additional output produced by adding one more unit of the variable input. In this, example, marginal output = D total output/D labor input; you should be able to write a formula for this in Excel to calculate these values or do them by hand.
c. What are the implications of the law of eventually diminishing returns for the maximum level of output? What is this maximum?
d. Can total output ever be increased beyond 155? How? Show this in the graph you drew in part a.
