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 reurns, then negative returns, then diminishing returns.
The most likely answer here is A. Marginal returns rise at first, then drop. In extreme cases, they could even become negative. This is due to the law of diminishing marginal returns. This law applies in the short run.
Let us imagine that you have a small factory with four machines. Right now, you have two employees running the two machines. Let us say that you hire another worker. Now, each worker does not have to be responsible for as many machines. They can work more efficiently and your output rises. The same thing happens when you hire a fourth worker. It may even happen if you hire a fifth who can bring parts to the other four or take away finished products.
But eventually your marginal returns will drop. Let’s say you hire a 6th person and that person really doesn’t have enough to do. They might help get things done a little bit, but they will not be nearly as helpful as the other new hires were. This is your range in which returns diminish.
It is even possible that you might get into negative returns if you make really bad decisions about how many people to hire. If you hire enough people, they might get in each other’s’ way and actually make it harder to produce goods.
Thus, A is the best answer.
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