Final answer:
When diminishing returns set in for a firm where labor is the only variable input, additional workers contribute less to output than previous workers, leading to a decrease in the marginal product of labor due to the fixed availability of other production resources.
Step-by-step explanation:
For a firm where labor is the only variable input, diminishing returns set in when adding more workers leads to a decrease in the marginal product of labor. This means that each additional employee contributes less output than the previous one. The phenomenon of diminishing marginal productivity occurs because, in the short run, all other factors of production are fixed, and at some point, the additional labor becomes less effective as the firm cannot proportionally increase its usage of space, machinery, or raw materials to match the increase in labor.
This concept is important in the production process as it helps explain how and why the output will begin to increase at a diminishing rate after a certain number of workers are hired. A second worker might improve productivity significantly if their labor alleviates a bottleneck, like answering phones, but a third worker's contribution, such as bringing coffee, may be less critical to the productivity of the workers who are directly involved in production.
Understanding when diminishing returns kick in allows firms to optimize their labor force and manage costs effectively, preventing overstaffing and underutilization of labor resources. In practice, a firm would need to evaluate at what point hiring additional workers leads to a suboptimal return on investment—that is, when the cost of hiring an additional worker is not offset by the value of the additional output produced.