Economists sometimes prove the law of diminishing marginal returns with the following exercise: Suppose that production of

Question:

Economists sometimes "prove" the law of diminishing marginal returns with the following exercise: Suppose that production of steel requires two inputs, labor and capital, and suppose that the production function is characterized by constant returns to scale. Then, if there were increasing marginal returns to labor, you or I could produce all the steel in the world in a backyard blast furnace. Using numerical arguments based on the production function shown in the following table, show that this (logically absurd) conclusion is correct. The fact that it is correct shows that marginal returns to labor cannot be everywhere increasing when the production function exhibits constant returns to scale.