Chapter 8: Problem 26

In general, as output rises you first attain _____. a) increasing returns, then diminishing returns, then negative returns b) diminishing returns, then negative returns, then increasing returns c) negative returns, then increasing returns, then diminishing returns d) increasing returns, then negative returns, then diminishing returns

Short Answer

Expert verified

a) increasing returns, then diminishing returns, then negative returns

Step by step solution

Understanding Different Types of Returns

As the output rises, there are three main types of returns to be considered: increasing returns, diminishing returns, and negative returns. These phases represent how a firm's output changes as it increases its inputs.

Analyzing Option a)

The statement suggests that when output rises, the firm experiences increasing returns first, then diminishing returns, and finally negative returns. This order does make economic sense. Initially, increasing returns occur when an additional unit of input leads to proportionally more output. As more inputs are added, diminishing returns set in, meaning that adding another unit of input now results in a less than proportional increase in output. Finally, at some point, adding even more input results in negative returns, where output actually begins to decrease.

Analyzing Option b)

This statement suggests that when a firm's output rises, it first experiences diminishing returns, then negative returns, and finally increasing returns. This order is not consistent with how a firm functions under normal circumstances. It might happen in some exceptional cases, like in industries with high specialization, where an increase in inputs might result in the output level improvement over time.

Analyzing Option c)

The statement proposes that the order is negative returns, increasing returns, and then diminishing returns when output rises. This sequence is also not consistent with how firms typically function since a firm initially aims to benefit from increasing returns rather than dealing with negative returns.

Analyzing Option d)

The statement suggests that the output rise entails increasing returns first, then negative returns, and finally diminishing returns. This order is incorrect as it does not follow the logical progression firms observe. A firm would usually transition from increasing returns to diminishing returns before entering negative returns, rather than going from increasing to negative returns right away. Given the analysis of all the answer options, the correct order of phases is given in option a). So, the correct answer is: a) increasing returns, then diminishing returns, then negative returns

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