Question

Your friend has a large garden and grows fresh fruit and vegetables to be sold at a local farmer's market. Your friend comments, 'I hired a college student who was on summer vacation to help me this summer and my production more than doubled. Next summer, I think I'll hire two or maybe three helpers and my output should go up more than three or fourfold'. If all production process eventually exhibit diminishing marginal product of the variable inputs, could it be true that your friend hired a helper (doubled the labor) and more than doubled his production? Why or why not? By the way, in the long run, what must your friend do to the scale of his operation if he/she wants to continue to hire workers and have those workers generate proportional increases in production? Even in the long run, could your friend expand the scale of operation forever and continue to keep average costs at a minimum?

Answer 1

Yes. May production processes first exhibit increasing marginal product of the variable inputs (in this case, workers). This result may occur due to specialization of labor. After the second worker is hired, one worker specializes in weeding while the other specializes in watering.

No. At some point, if any input is fixed (say the size of the garden), the firm will experience diminishing marginal product of the variable input. That is, at some point, the garden will become crowded, and additional workers will add smaller and smaller amounts to output.

It is likely that the garden is small enough that the firm would experience economies of scale if it increased its scale of operation by expanding the size of the garden and hiring more workers. No, your friend cannot expand his scale of operations forever because, at some point, the firm becomes so large that is develops coordination problems and the firm experiences diseconomies of scale.

Hope this helps :)