Final answer:
The average product of labor diminishes when the marginal product of labor is smaller than the average product, an indicator of diminishing marginal productivity, a concept reflecting the Law of Diminishing Marginal Product due to fixed capital.
Step-by-step explanation:
The average product of labor diminishes when the marginal product of labor is smaller than the average product of labor. This situation typically implies that diminishing marginal productivity is taking place, which is the general rule that as a firm employs more labor, the amount of additional output (or production) produced declines after a certain point. The marginal product of labor is the additional output produced by one more worker, and diminishing marginal productivity can be attributed to factors such as fixed capital, which can limit the efficacy of adding more labor.
When the marginal product of labor is less than the average product of labor, each new worker contributes less to the total output than the average of the existing workers, leading to a decline in the average product of labor. This reflects the Law of Diminishing Marginal Product, a characteristic of production in the short run. Additionally, when the production function is concave, it visually represents the decreasing marginal returns associated with adding more labor. It is important to note that if the marginal product of labor becomes negative, it will directly decrease the total output.