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CONFIRMING PAGES

keygraph The Costs of Production 383
CHAPTER 20

FIGURE 20.2 The law of diminishing
75 returns. (a) As a variable resource (labor) is added to fixed
TP
amounts of other resources (land or capital), the total product
that results will eventually increase by diminishing amounts,
reach a maximum, and then decline. (b) Marginal product is the
Total product, TP 50 Average product is simply output per labor unit. Note that
change in total product associated with each new unit of labor.
marginal product intersects average product at the maximum
average product.
25

0 1 2 3 4 5 6 7 8 9
Quantity of labor
(a)
Total product

Increasing Diminishing Negative
Marginal product, MP 10 AP
marginal
marginal
marginal
20
returns
returns
returns

MP
0 1 2 3 4 5 6 7 8 9
Quantity of labor
(b)
Marginal and average product

QUICK QUIZ 20.2
1. Which of the following is an assumption underlying these 3. Marginal product in graph (b) is zero when:
figures? a. average product in graph (b) stops rising.
a. Firms first hire “better” workers and then hire “poorer” b. the slope of the marginal-product curve in graph (b) is zero.
workers. c. total product in graph (a) begins to rise at a diminishing rate.
b. Capital and labor are both variable, but labor increases more d. the slope of the total-product curve in graph (a) is zero.
rapidly than capital. 4. Average product in graph (b):
c. Consumers will buy all the output (total product) produced. a. rises when it is less than marginal product.
d. Workers are of equal quality. b. is the change in total product divided by the change in the
2. Marginal product is: quantity of labor.
a. the change in total product divided by the change in the c. can never exceed marginal product.
quantity of labor. d. falls whenever total product in graph (a) rises at a
b. total product divided by the quantity of labor. diminishing rate.
c. always positive.
d. unrelated to total product. Answers: 1. d; 2. a; 3. d; 4. a

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9/7/06 3:42:26 PM
mcc26632_ch20_378-398.indd 383
mcc26632_ch20_378-398.indd 383 9/7/06 3:42:26 PM