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Questions and Answers
What is the main idea behind the Law of Diminishing Marginal Returns?
What is the main idea behind the Law of Diminishing Marginal Returns?
- The skills of the worker are the only factor that affects productivity
- As the quantity of a fixed factor increases, output also increases
- The quality of the capital determines the output
- As the quantity of a variable factor increases, the marginal output eventually decreases, provided another factor is fixed (correct)
What is a limitation of the MRP theory in setting wage rates?
What is a limitation of the MRP theory in setting wage rates?
- The selling price of the output affects the MRP
- The quality of the capital affects the MRP
- It is difficult to distinguish the portion of output due to the worker's productivity (correct)
- It is difficult to measure the productivity of workers
What happens to the marginal output as the quantity of a variable factor increases, according to the Law of Diminishing Marginal Returns?
What happens to the marginal output as the quantity of a variable factor increases, according to the Law of Diminishing Marginal Returns?
- It remains constant
- It increases at an increasing rate
- It eventually begins to diminish (correct)
- It increases at a decreasing rate
Why does the MRP curve eventually slope downwards?
Why does the MRP curve eventually slope downwards?
Which type of workers does the MRP theory have difficulty in setting wage rates for?
Which type of workers does the MRP theory have difficulty in setting wage rates for?
What is an advantage of the MRP theory in setting wage rates?
What is an advantage of the MRP theory in setting wage rates?
What is labour in the context of factor of production?
What is labour in the context of factor of production?
What is the payment for labour?
What is the payment for labour?
What is nominal wage?
What is nominal wage?
What is real wage?
What is real wage?
Which of the following is an aspect of labour?
Which of the following is an aspect of labour?
Study Notes
The Law of Diminishing Marginal Returns
- As units of a variable factor (e.g. labour) increase, combined with a fixed amount of another factor (e.g. capital), the extra output generated eventually diminishes.
- This concept explains why the Marginal Revenue Product (MRP) curve eventually slopes downwards.
Factors Affecting Marginal Revenue Product of Labour
- Skills of the worker: higher skills, qualifications, and motivation lead to greater productivity.
- Quality of capital: high-spec machinery increases productivity.
- Ability of the employer/manager: effective motivation by the manager boosts productivity.
- Morale due to working conditions: uncomfortable conditions lead to lower productivity.
- Selling price of the output: affects the MRP of labour.
Limitations of the Theory in Setting Wage Rates
- Difficulty in measuring productivity for service workers (e.g. nurses) who don't produce a physical product.
- Challenge in distinguishing the portion of output attributed to worker productivity when labour is used with capital.
Labour as a Factor of Production
- Labour refers to the human effort involved in the production of goods and services.
- It is a fundamental factor of production, essential for creating goods and services.
Types of Wages
- Nominal Wage: The monetary value of an employee's wage or salary, without considering its purchasing power.
- Real Wage: The actual value of an employee's wage or salary, taking into account its purchasing power, i.e., what it can buy in terms of goods and services.
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Description
Learn about the Law of Diminishing Marginal Returns, its relation to Marginal Revenue Product, and the factors affecting it, including skills of workers and quality of capital.
