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Chapter 7: Problem 1

The following table shows total output (in tax returns completed per day) of the accounting firm of Hoodwink and Finagle: $$\begin{array}{cc}\text { Number of } & \text { Number of Returns } \\\\\text { Accountants } & \text { per Day } \\\\\hline 0 & 0 \\\1 & 5 \\\2 & 12 \\\3 & 17 \\\4 & 20 \\\5 & 22\end{array}$$ Assuming the quantity of capital (computers, adding machines, desks, etc.) remains constant at all output levels: a. Calculate the marginal product of each accountant. b. Over what range of employment do you see increasing returns to labor? Diminishing returns? c. Explain why \(M P L\) might behave this way in the context of an accounting firm.

Short Answer

Expert verified
a. The MPL for each accountant is: 1st accountant = 5, 2nd accountant = 7, 3rd accountant = 5, 4th accountant = 3, 5th accountant = 2.\nb. The range of employment with increasing returns to labor is from 0 to 2 accountants, and the range with diminishing returns to labor is from 2 to 5 accountants. \nc. The MPL behaves this way due to the law of diminishing returns. As more accountants are added to a fixed amount of capital, each accountant has less capital to work with, leading to smaller increases in output.

Step by step solution

01

Calculate MPL

The MPL can be calculated using the formula: MPL = Change in Total Output / Change in Labor. Based on the data in the table, the MPL for each additional accountant can be calculated as follows: for the 1st accountant, MPL = (5-0)/(1-0) = 5; for the 2nd accountant, MPL = (12-5)/(2-1) = 7; for the 3rd accountant, MPL = (17-12)/(3-2) = 5; for the 4th accountant, MPL = (20-17)/(4-3) = 3; for the 5th accountant, MPL = (22-20)/(5-4) = 2.
02

Identify the Range of Employment with Increasing and Diminishing Returns to Labor

The range of employment with increasing returns to labor is the range where the MPL is increasing, which is from 0 to 2 accountants. The range with diminishing returns to labor is the range where the MPL is decreasing, which is from 2 to 5 accountants.
03

Explain the Behavior of MPL

The MPL is behaving this way because of the law of diminishing returns, a principle stating that at some point, adding an additional unit of a variable input, holding all other inputs constant, will result in smaller increases in output. In an accounting firm, as more accountants are added to a fixed amount of capital, each accountant has less capital to work with, so the additional output produced by each accountant declines.

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Most popular questions from this chapter

In a recent year, a long, hard winter gave rise to stronger-than-normal demand for heating oil. The following summer was characterized by strong demand for gasoline by vacationers. Show what these two events might have done to the short-run \(M C, A V C\) and \(A T C\) curves of Continental Airlines. (Hint: How would these events affect the price of oil?)

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