Question

Suppose that the Law of Diminishing Returns never sets in (that is, the Division of Labor continues to hold regardless of the size of the labor force). What would the short run marginal cost, average cost and average variable cost curves look like? Explain.

Answer 1

According to the law of diminishing returns, whenever there is an additional unit of a variable factor is hired, the additional product produced by it goes on falling which results in inverse u shaped marginal product and average product cost and u shaped average variable cost average total cost and marginal cost curves.

If there are no diminishing returns, it would implies that every additional unit of labour hired by the firm will result in the same additional product because the additional unit of labour is equally productive. This indicates that marginal product of labour and average product of labour would be horizontal. Accordingly the short run marginal cost average cost and average variable cost curves will all be flat line.