Question One: Production in the Short Run
In economics, diminishing marginal returns predicts that an increase in a variable input in the production process, while holding other factors constant, leads to a decrease in the marginal per unit output. In other words, when one input variable is increased, while others are held constant, the marginal per unit output also increases significantly. However, when production reaches the optimal point, an increase in variable input may decrease marginal per unit output. In this case scenario, the manager refers to the short run when he argues that the grocery store will reach diminishing marginal returns to labor because it is only at this stage that production factors may be a combination of variable and fixed elements. In my view, some of the things that might have triggered the manager’s perspective include a decline in grocery sales despite an increase in customers. Arguably, increasing customers while holding the number of workers constant might have led to the diminishing marginal returns to labor.
Question Two: Costs
In economics, the marginal cost refers to an increase in the cost of producing an additional commodity unit. The marginal cost is also termed as the increase in cost that arises from an increase in output. For example, if a firm plans to purchase new equipment to increase fabric production, the additional cost of buying the new machine is the marginal cost. As shown in this example, the machine’s cost relates to the firm’s production costs. However, as can be seen from the case scenario, the two variables are unrelated because an increase in rent does not increase production. Therefore, it is inaccurate for the store manager to argue that a rent increase will increase the marginal costs.
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