Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It increases producer surplus by allowing more efficient production.
B
It decreases producer surplus as increasing input leads to lower additional output.
C
It has no effect on producer surplus as prices remain constant.
D
It only affects producer surplus in monopolistic markets.
Understanding the Answer
Let's break down why this is correct
Answer
Diminishing returns happen when adding more of one resource, like labor, leads to smaller increases in output. In a competitive market, as producers try to make more products, they may find that each additional worker produces less than the last one. This can affect producer surplus, which is the difference between what producers are willing to accept for a good and what they actually receive. For example, if a farmer hires more workers to increase crop yield, but each new worker contributes less to the harvest, the farmer might not be able to sell the extra crops for much more money. As a result, the overall producer surplus can decrease because the costs of production rise without a proportional increase in revenue.
Detailed Explanation
Diminishing returns means that adding more resources leads to smaller increases in output. Other options are incorrect because Some might think that more efficient production always increases surplus; It's a common mistake to think prices don't change with output.
Key Concepts
Producer surplus
Diminishing returns
Topic
Production Possibilities and Price Effects
Difficulty
medium level question
Cognitive Level
understand
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