Thought experiment of law of diminishing marginal returns and marginal costs (11 marks, suggested word count: 400 words)

In the lecture of topic 3, there is a hypothetical case of cake production in which labor is assumed to be a variable input and perform their tasks in a fixed capital factory. The lecture introduces the law of diminishing marginal returns, the argument of diminishing labor productivity in the production process with fixed capital. This is viewed as a law in the theory of production in classical economics given the assumption that firms do not have sufficient time to divert all of resources (inputs) and hence they have some existing fixed input in production (so-called short-run production). In addition, the law of diminishing marginal returns helps to explain the marginal costs in production of the cake business, which in tun would affect firms profits in short run production.

One student finds it interesting to do an experiment of this law of diminishing marginal returns in the services provided in his university. He wonders whether the problem of diminishing marginal returns is applied in different activities in the university, such as: is the law applied for library services? applied for a food store in the canteen area? Or for the services at recreation and entertainment center (REC) of the university?

The student is also curious about the marginal costs in the production of the services in campus. He is concerned whether the marginal costs of the additional service unit served affects the service providers businesses.

Requirement:

a) [7 marks] Demonstrate one sample experiment, settings, hypothetical numbers and calculations, for the student to learn from you.

Instructions for steps to develop the experiment:

Firstly, you imagine a service provider in a school as a firm and its service as output of the firms production process. Then determine the possible inputs in the service production. Assume the service production in short run, which input is likely variable? And which input/s are likely fixed ones? (so called settings of the experiment).

Secondly, come up with some hypothetical numbers and calculations of inputs and outputs of the service production. Determine what input/s of the service are set to increase or be fixed, what the relative output rate compared to the inputs is, what measure be calculated to illustrate diminishing marginal returns.

Note: you need to provide assumption/s of your experiment for the diminishing marginal returns to hold true.

b) [4 marks] Give an explanation for clarifying the students concern about the relation between diminishing marginal returns and marginal costs of a service production. Hypothetical numbers and calculations are required in the explanation.

Make sure you do not duplicate the hypothetical case in the lecture slides. Each individual student needs to show their original experiment of one of the services in a university campus suggested in the question.