Sunday, August 14, 2011
What underlies the law of diminishing marginal returns?
The law of diminishing returns states the each worker (starting at a point) contributes less to the production process as the worker before. For instance, if you had a pizza operation, you could higher, say, 10 people and make 20 pizzas an hour. But, what if you hired 20, or 30. Common sense would probably say 30 people could make 60 pizzas in an hour. But, suppose they can't. Suppose you only have 4 ovens. So you can only cook 8 pizza's every 1/2 an hour. No matter how many workers you hire, you can only make X amount of pizzas. X will get to a point where it won't increase.
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