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What are some real-life situations, in which the marginal return of an input becomes negative?
What are some real-life situations, in which the marginal return of an input becomes negative?
Expert Solution
An example of the marginal return of labor productivity going negative would be too many cooks and servers in a small but busy kitchen. They will end up in each other's way and slow down the process of serving customers.
If that same restaurant is an all-you-can-eat buffet, the customers may try too hard to get their money's worth and overeat to the point where the marginal utility of another serving or even another bite becomes negative.
The rule of marginal production is to produce where marginal revenue (the revenue from selling one more unit) is equal to the marginal cost (the cost of producing that same unit). When the cost exceeds the revenue, the marginal revenue becomes negative and there is no more profit to be earned.
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