- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 1. The Firm and Market Structures
- Subject 5. Understanding Economies and Diseconomies of Scale
CFA Practice Question
A firm's average total cost increases as it increases its output by hiring additional workers. The firm's owners blame the increase in per-unit costs on the law of diminishing marginal productivity. Assume all costs are variable costs. The owner's argument is ______
A. correct because some inputs are fixed in the long-run.
B. correct because marginal productivity must decrease in the short run.
C. incorrect because all inputs are varied in the example.
Explanation: The law of diminishing marginal productivity applies only when some inputs are fixed, but that is not the case in this example.
User Contributed Comments 3
| User | Comment |
|---|---|
| mdmorshed | Can anyone explain this. Which input needs to be fixed. |
| hvanwyk | In the SHORT run, at least one factor of production is fixed. In the LONG run, quantities of all factors of production can be varied. |
| poomie83 | However in this question all costs are variable therefore the SR or LR does not come into play |