Economics

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At a management luncheon, two managers were overheard arguing about the following statement “A manager should never hire another worker if the new person causes diminishing returns”. Is this statement correct? If so, why? If not, explain why not.

  • Economics -

    This statement seems correct to me. Why should a company pay an additional salary and benefits for an employee that doesn't add to its profits.

  • Economics -

    Ms Sue's statement is correct. However I would add the following.

    A firm should hire until the value of the marginal product (aka marginal revenue product or MRP) equals the marginal cost of the input (aka the marginal factor cost or MFC). The MRP will decline because of diminishing returns. However, as long as MRP > MFC, the firm should keep hiring, even if diminishing returns are occuring.

  • Economics -

    Thank you Ms. Sue & Economyst. Your assistance is much appreciated.

  • Economics -

    Sorry but the correct answer is no. Diminishing return is not something to prevent the hiring of employees. I'm not going to say more ~ read your text, it is in there.

  • Economics -

    The statement, “A manager should never hire another worker if the new person causes diminishing returns.” is false. A manger should hire what is needed as long as the point of negative marginal product is not reached. Going beyond the point of diminishing returns is okay, just not beyond negative marginal product.

  • Economics -

    Diminishing return is the stage of production which the increase in input should be stopped. But even in this stage, the employer can still hire a new person if the value of marginal product is above the wage rate. The rule is that P x MP= input price. If the wage rate declines, it will hire more person. Or the value of MP increase due to an increase in product price,it can still hire new person. That's why the demand for inputs is downward sloping

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