(a) State the law of diminishing return
(b) What is (i) marginal product (ii) average product?
(c) Explain any three factors that determine the size of firms.
Explanation
(a) The law of diminishing returns states that as successive units of a variable factors are added to one or more fixed factor, marginal output increases at first but there comes a point at which the use of one more unit of the variable factor will add less to total output than the preceding unit.
(b) (l) Marginal product This is the additional output obtained by adding one more unit of the variable factor Or \(\frac{change in Total output}{change in variable factor}\)
(ii) Average product— This is the output per unit or the variable factor or \(\frac{Total output}{Total units of the variable factor}\)
(c) (i) The nature of the product of the firm,
(ii) Size of the market
(iii) The amount of capital available to a firm
(iv) Opportunities available for growth e g technology, government policies (v) The objective and capability of the firm owner.
(vi)Availability of inputs.
(vii) Business uncertainty - Some businesses remain small because they do not want to take risk.