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Suppose Tax Advisors, Inc., has an office for processing tax returns in Scranton,

Pennsylvania.

Table 7.3 shows that if the office employs one certified public accountant (CPA), it

can process 0.2 tax returns per hour.

Adding a second CPA increases production to 1 return per hour; with a third,

output jumps to 2.4 returns processed per hour. In this production system, the

marginal product for the second CPA is 0.8 returns per hour as compared with 0.2

for the first CPA employed.

The marginal product for the third CPA is 1.4 returns per hour.MPCPA-2 = 0.8

seems to indicate that the second CPA is four times as productive as the first, and

MPCPA-3 = 1.4 says that the third CPA is more productive still.

In production analysis, however, it is assumed that each unit of an input factor is

like all other units of that same factor, meaning that each CPA is equally

competent and efficient. If individual differences do not account for this

increasing productivity, what does?

Typically, increased specialization and better utilization of other factors in the

production process allow factor productivity to grow. As the number of CPAs

increases, each can specialize.

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Also, additional CPAs may be better able to fully use computer, clerical, and other

resources employed by the firm. Advantages from specialization and increased

coordination cause output to rise at an increasing rate, from 0.2 to 1 return

processed per hour as the second CPA is employed, and from 1 to 2.4 returns per

hour as the third CPA is added. 

In practice, it is very rare to see input combinations that exhibit increasing returns

for any factor. With increasing returns to a factor, an industry would come to be

dominated by one very large producer—and this is seldom the case.

Input combinations in the range of diminishing returns are commonly observed.

If, for example, four CPAs could process 2.8 returns per hour, then the marginal

product of the fourth CPA (MPCPA-4 = 0.4) would be less than the marginal

product of the third CPA (MPCPA-3 = 1.4) and diminishing returns to the CPAlabor input would be encountered.

The irrationality of employing inputs in the negative returns range, beyond X 3 in

Figure 7.3, can be illustrated by noting that adding a sixth CPA would cause total

output to fall from 3.0 to 2.7 returns per hour. The marginal product of the sixth

CPA is –0.3 (MPCPA-6 = –0.3), perhaps because of problems with coordinating

work among greater numbers of employees or limitations in other important

inputs.

Would the firm pay an additional employee when employing that person reduces

the level of output? Obviously not: It is irrational to employ inputs in the range of

negative returns.

MRPx = TR/ X