Economics Essay on Regularities in Spearman’s law of diminishing returns

Economics

Problem 1

  1. The fixed inputs are the salaries of employees and the price of ovens. This is because the price of one oven does not change no matter the number of ovens bought. Similarly, the weekly wages of one employee does not change. This implies that as the number of employee’s increase the wage bill increases at a constant rate because the salary paid to employees is fixed. There is an increase in productivity as the number of employees increase from one to seven. From there onwards there is a decrease as the number of workers increase. This increase in quantity produced indicates that as more workers are hired, they make the most of the resources resulting to an increase in individual quantity produced. Beyond seven workers, the quantity reduces which is caused by saturation in the amount of resources available causing a decline in production.  It can be concluded that the quantity produced decreases with increase in number of employees from seven employees upwards.
  2. The most efficient number of employees is seven where each produces 180 pizzas per day. This is the highest amount produced by any single employee in the all the employee groups. This makes it the most efficient and the one that the management should hire to maximize on its available production resources.
  3. The marginal cost of pizza is minimized by seven employees because they are the most efficient. Increasing them without increasing inputs leads to a decline in productivity which increases marginal cost. This increase in marginal cost is caused by the increased wage resulting from the extra worker and the net effect of reducing the efficiency of the group.
  4. The marginal productivity would decline because as the number of employees increase without an increase in production resources then the quantity produced declines (Jensen, 2003). This continues with every new worker hired without increasing the basic inputs which affect the production.
  5. Expanding the business would result to buying of more production resources. As a result, this would increase the economies of scale which would increase the profit margin. This increase is usually caused by quantity discounts and the overall reduced cost per unit produced `that result from large scale production.  Diseconomies of scale would occur if the company increased its production quantity and then decided to distribute its pizzas to nearby markets. The transport costs incurred plus the distribution workers employed would reduce the profits leading to diseconomies of scale (Lambrecht, 2004).  This move would increase sales but would also increase expenses. If the expenses increase at a higher rate, then the company incurs losses resulting from diseconomies of scale.

Problem 2

  1. The marginal cost is the increase in production expenses due to an increase in output. This change occurs because certain inputs such as equipments, workers etcetera increase with increase in output.
  2. Marginal cost = change in total cost/change in output

TVC=3450+20Q+0.008Q2

TVC = 3450+20(1200) +0.008(12002)

3450+24000+0.008(1440000) =$38970

Original cost for 1000 pairs

=3450 + 20(1000) + 0.008(10002)

3450+20000+8000= $31450

The increment is 38970-31450=$7520

  • Q=4100-25P

1200=4100-25P

25P=4100-1200

=$116

  • Increasing the quantity beyond 1200 pairs will only increase the expenses which will lower the profit margin. This implies that the company should not produce more shoes due to the likely increment in production costs that will force them to increase prices or deal with decreasing profits (Madsen, 2007). Increasing prices will affect the demand of the shoes lowering the sales volume. This decline in sales will affect the profit margin of the company.

References

Jensen, A. R. (2003). Regularities in Spearman’s law of diminishing returns. Intelligence, 31(2), 95

Lambrecht, B. M. (2004). The timing and terms of mergers motivated by economies of scale. Journal of Financial Economics, 72(1), 41-62.

Madsen, J. B. (2007). Are there diminishing returns to R&D?. Economics Letters, 95(2), 161-166.