Author Question: What is meant by diminishing marginal benefits? Are you likely to experience diminishing marginal ... (Read 108 times)

kamilo84 · **on:** Jun 29, 2018

What is meant by diminishing marginal benefits? Are you likely to experience diminishing marginal benefits for goods that you like a lot? Are there exceptions to the general rule of diminishing marginal benefits? (Hint: think about batteries that you

would use in a flashlight that requires two batteries.) Explain your answer.

Question 2

A railroad company lays a line of track between Houston and Dallas. It provides daily service for industrial customers and ships 5,000 ton-miles per day with a single train and only one departure and arrival at each end.

It has an opportunity to purchase a second train that would allow it to ship twice the amount of ton-miles per day. Does this firm face increasing, constant or decreasing returns to scale? Explain.

meganmoser117 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

Diminishing marginal benefit from a good suggests that the willingness to pay for an additional unit declines as more is consumed. You are likely to experience diminishing marginal benefit even from goods that you like a lot, although you will probably consume more of those goods before diminishing marginal benefits sets in. The first ice cream is delicious. The second is still very tasty but not quite as good as the first. The third might make you sick to your stomach.
Yes, there could be exceptions to the rule of diminishing marginal returns. If a flashlight does not function without both batteries, you would experience increasing marginal benefits; the first battery is useless but the second makes the flashlight work.

Answer to Question 2

The company was able to double the amount of output without necessarily doubling the amount of inputs. While it probably needs close to double the amount of labor it certainly won't need to double the amount of track since the track in place is sufficient to get the job done. Therefore, it is faces increasing returns to scale.