Law of Diminishing of Returns

Law of Diminishing of Returns - Law of Diminishing of...

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Law of Diminishing of Returns Why is this the case, that labor demand is at its optimal point when MRP of labor is equal to the wage? This holds true because of the law of diminishing returns. When a firm is hiring workers and deciding how many hours of labor it needs, it operates with the knowledge that the first hour added will make the biggest difference. For a while, every additional hour of labor for which a firm pays will yield a large marginal revenue. However, as the workers put in more and more time, each additional hour of work will yield less revenue. This phenomenon is true for several reasons: as the workers make more and more products, there may be a surplus, and not enough demand for the goods, in which case the marginal revenue would eventually fall to 0. Another reason underlying this fall in production is that after a certain point, extra workers and extra hours can be unproductive. Imagine, for instance, that a small furniture store is hiring workers. One worker will get a good
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This note was uploaded on 02/09/2012 for the course ECO ECO2013 taught by Professor Jominy during the Fall '08 term at Broward College.

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Law of Diminishing of Returns - Law of Diminishing of...

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