The correct answer is: C. Both 1 and 2
- MP is also called MPP.
Marginal product (MP) is the additional output produced by adding one more unit of input. Marginal physical product (MPP) is the additional output produced by adding one more unit of labor. Therefore, MP is also called MPP.
- Physical product refers to production as measured in terms of physical units of the commodity.
Physical product (TP) is the total output produced by a firm or industry. It is measured in physical units, such as tons of steel, barrels of oil, or number of cars.
- TP increases even when MP is decreasing.
This is because the law of diminishing returns states that as more and more of a variable input is added to a fixed input, the marginal product of the variable input will eventually decline. However, the total product may still increase even when the marginal product is decreasing, as long as the marginal product is still positive.
For example, let’s say a firm has one machine and one worker. The first worker produces 10 units of output. The second worker produces 9 units of output. The third worker produces 8 units of output. The marginal product of the second worker is 9 – 10 = -1. The marginal product of the third worker is 8 – 9 = -1. However, the total product is still increasing, as the firm is producing 27 units of output with two workers and 36 units of output with three workers.
Therefore, the correct answer is: C. Both 1 and 2