1. The Law of Diminishing Returns: a. Given a fixed factor (i.e. “In the short run …”) b. if a large enough quantity of a variable factor is used c. then the output per unit of variable input will, at some point, begin to fall. For example: Given a fixed quantity of capital (machinery), there is a quantity of labor, beyond which, output per worker will fall.

2. The Law of Diminishing Returns: Some examples of fixed inputs, variable inputs, outputs and the Law of Diminishing Returns making chairs: a. Variable input b. Output c. Fixed input workers chairs lathes exercising: a. Variable input b. Output c. Fixed input time spent weight loss metabolism practicing: a. Variable input b. Output c. Fixed input time spent how good talent eating ice cream: a. Variable input b. Output c. Fixed input cones utility taste for ice cream

3. The Law of Diminishing Returns: In each case as the amount of variable input is increased, the output per unit input will eventually decline: E.g. The next worker will add less to production than did the previous worker. The next ice cream cone will not taste as good as the last one. The last hour spent exercising will produce less weight loss than the previous hour. The next hour spent practicing will add less to your ability than did the hour before.

4. a. Given a fixed (“In the short run …”) The Law of Increasing (variable) Cost (per unit) b. if a sufficient quantity of the output is produced c. variable cost per unit (vcpu) will eventually rise

5. The Law of Increasing Costs: In each case as the amount of output is increased, the variable cost per unit output will eventually rise. Restatements of earlier examples. The next chair will add more to cost than did the previous chair. The next util gained from eating ice cream will require more ice cream – and higher cost – than did the previous util. Each pound lost will require more hours of exercise The next unit increase in ability will require more hours of practice than did the previous unit of ability.

6. The Fundamental Theorem of Microeconomics 1. Variable cost per unit is inversely related to output per worker 2. The Law of Diminishing returns is the same law as the Law of Increasing Costs

7. Labor (L) Output (Q) Output per Worker (Q/L) Labor Costs TVC = w*L Variable Cost per Unit vcpu = TVC/Q 12120 24300 48400 Wage = 50 Labor is the only variable cost 106005 12.512004 8.3324006

8. This illustrates the fundamental theorem from row 1 to row 2: output per worker is rising, there are increasing returns to labor and vcpu is falling from row 2 to row 3: output per worker is falling, there are diminishing returns to labor and vcpu is rising Output per worker and vcpu are always inversely related. The Law of Diminishing Returns and the Law of Increasing Costs both say that we must always reach something like row #3 Labor (L) Output (Q) Output per Worker (Q/L) Labor Costs TVC = w*L Variable Cost per Unit vcpu = TVC/Q 12120106005 2430012.512004 484008.333324006