Diminishing returns to capital is a consequence of firms' incentives to use each piece of capital as productiv

Question

Diminishing returns to capital is a consequence of firms' incentives to use each piece of capital as productively as possible and illustrates the:

A. principle of comparative advantage.

B. principle of increasing opportunity costs.

C. scarcity principle.

D. equilibrium principle.

E. cost-benefit principle.

Answer 1

All the principles are relevant. But the best to choose from them is the cost benefit principle which seeks to maximise the net benefit from the use of any resource. When a firm seeks to use each piece of capital as productively as possible, he will use more and more capital till the marginal revenue productivity of capital equals the marginal cost of capital, thus the net benefit from the last piece of capital is zero ( all ealier pieces having contributed a surplus and any more capital pice will contribute negative surplus). As some one goes on increasing capital, at some point some other factor will become scare and the returns to additional pieces of capital will start falling.

Answer 2

D. equilibrium principle

it's equilibrium of MPK/r=MPL/w

MPK marginal product of capital

MPL marginal product of labor

r - price of capital (interest rate)

w - price of labor (wage)

Though it's possible to come to same result through E, C, B and A also - so it's doubtful and a bit confusing question.