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Diminishing Marginal Returns
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In the context of production, how do diminishing marginal returns differ from returns to scale?

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A

Diminishing marginal returns occur when adding an input results in a decrease in output, while returns to scale refer to how output changes as all inputs are increased proportionately.

B

Diminishing marginal returns apply only in the short run, whereas returns to scale can apply in the long run.

C

Diminishing marginal returns can lead to negative output, while returns to scale always result in increased output.

D

Diminishing marginal returns are linked only to labor inputs, while returns to scale consider both labor and capital.

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Answer

Diminishing marginal returns happen when adding more of one input, like labor, leads to smaller increases in output after a certain point. For example, if a factory hires more workers to produce toys, initially, production might rise quickly, but eventually, each new worker adds less and less to total output because they might get in each other's way or run out of machines to use. In contrast, returns to scale refer to how output changes when all inputs are increased together, like doubling all workers and machines. If a factory doubles its inputs and its output also doubles, it has constant returns to scale. However, if output increases more than double, it has increasing returns to scale, and if it increases less than double, it has decreasing returns to scale.

Detailed Explanation

Diminishing marginal returns happen when adding more of one input, like workers, leads to less extra output. Other options are incorrect because This answer suggests that diminishing returns only happen in the short term; This option implies that diminishing returns can create negative output, which is not true.

Key Concepts

diminishing marginal returns
returns to scale.
Topic

Diminishing Marginal Returns

Difficulty

medium level question

Cognitive Level

understand

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