Economics Micro & Macro (CliffsAP)

B.Some reasons for diminishing marginal product of labor are:

■ Equipment is limited in a firm because of limited resources.

■ The area of each worker becomes smaller as more labor is hired.

■ Employees would get in each others’ way and cause a decrease in production.

■ In a large firm communication is another problem of production, and suppliers cannot supply as many

raw goods as needed.

C.As the marginal product of workers decreases, the firm would stop hiring at point A shown on the graph.

The first and the second workers are producing increasing marginal returns, but the third and fourth workers are

producing with diminishing marginal returns. After the fourth worker is hired, the fifth worker would get in the

way of the others, and incremental production per worker would decrease.

D.The fifth worker would agree to work at a wage where the firm makes 10-percent profit on the salary. Because

the fifth worker would only make 7 pizzas, the worker brings in $77 , so we have the formula:

Y(1+0.1) = $77

Where Y is the amount of wage the firm would pay the fifth worker. Here Y equals $70.

L (Workers)

Y (# Units

Produced) A, Slope

of MP = 0

Production Function

Part IV: AP Macroeconomics & Microeconomics Tests