Question

· Following is known about a firm:
Units of Labour (Input)
Total Output
1
2 123
4
5
6
50
110
150
180
180
150
State and explain the law underlying the change in output as input is changed. A
identify the various stages of change in total production.​

Answer 1

The data provided represents the relationship between the units of labor (input) and the corresponding total output produced by a firm. Analyzing this data allows us to observe the underlying law of production and identify the various stages of change in total production.

Explanation:

• Based on the data, the law underlying the change in output as input is changed is the Law of Diminishing Marginal Returns. This law states that as more units of a variable input (in this case, labor) are added while other inputs remain constant, the marginal product of that input will eventually decrease.
• Initially, as the firm increases its labor input from 1 to 2 units, the total output rises significantly from 123 units to 110 units, indicating increasing returns to scale. This stage is known as the Stage of Increasing Returns.
• However, as more labor is added beyond the second unit, the total output continues to increase, but at a decreasing rate. The firm experiences diminishing marginal returns, where the additional output gained from each additional unit of labor becomes smaller.
• This is evident as the total output increases from 110 units to 150 units when labor input is increased from 2 to 4 units.
• The next stage is the Stage of Diminishing Returns, where the total output still increases, but at an even slower rate. This can be seen as the total output increases from 150 units to 180 units when labor input is increased from 4 to 5 units.
• Finally, in the last stage, the Total Production Plateaus. Adding more labor beyond a certain point does not result in any additional increase in total output. In this case, the firm reaches a maximum output of 180 units when labor input remains at 6 units.

To summarize, the law underlying the change in output as input is changed is the Law of Diminishing Marginal Returns, which states that the marginal product of a variable input decreases as more units of that input are added while other inputs remain constant. The various stages of change in total production include the Stage of Increasing Returns, the Stage of Diminishing Returns, and the Stage of Total Production Plateau.

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