Question

Diminishing marginal product

Answer 1

[AI-generated answer — Bot GPT 3.5]

Diminishing marginal product refers to the phenomenon where the additional output produced by adding one more unit of a variable input decreases as more units of that input are added to the production process. In other words, each additional unit of input contributes less to the total output than the unit before it.

This concept is commonly observed in the short run when at least one input variable is fixed and other factors of production are varied. As more variable inputs are added to the fixed input, the marginal product of each additional unit of input decreases, eventually leading to diminishing returns to scale.

This concept is important for firms to understand because it can impact production decisions, such as the optimal level of input usage to achieve maximum output efficiency. Knowing when diminishing marginal product occurs can help firms avoid overinvesting in inputs that may not yield significant increases in output.