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An American survey has ranked Ireland as the eighth most entrepreneurial society in the world - Leaving Cert Economics - Question 5 - 2020
Question 5
An American survey has ranked Ireland as the eighth most entrepreneurial society in the world. (Source: The Irish Times, October 2019) (i) Define the factor of prod... show full transcript
Worked Solution & Example Answer:An American survey has ranked Ireland as the eighth most entrepreneurial society in the world - Leaving Cert Economics - Question 5 - 2020
Step 1
Define the factor of production enterprise.
Answer
Enterprise is the factor of production that involves organizing and managing resources to create goods or services. It encompasses the ability to bring together other factors of production—land, labor, and capital—while taking on the associated risks in the hope of earning a profit.
Step 2
Discuss four economic reasons why entrepreneurship is important to the Irish economy.
Answer
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Creates Employment: Entrepreneurs generate jobs by establishing businesses, which helps reduce unemployment and supports economic growth.
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Organises Production: They take the initiative to arrange the other factors of production, ensuring efficient utilization of resources in the economy.
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Decides Prices and Commodities: Entrepreneurs make critical decisions about pricing and the range of goods and services supplied, influencing market equilibrium and consumer choice.
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Drives Innovation and Investment: They are key contributors to innovation and can stimulate further investments in the economy, fostering a culture of creativity and competitiveness.
Step 3
Calculate the marginal product and marginal revenue product of labour for this firm.
Answer
The marginal product (MP) of each additional worker can be calculated by observing the change in total output when additional labour is employed:
- MP1 (1 to 2 workers): 25 - 10 = 15 units
- MP2 (2 to 3 workers): 45 - 25 = 20 units
- MP3 (3 to 4 workers): 60 - 45 = 15 units
- MP4 (4 to 5 workers): 70 - 60 = 10 units
- MP5 (5 to 6 workers): 77 - 70 = 7 units
- MP6 (6 to 7 workers): 82 - 77 = 5 units
The Marginal Revenue Product (MRP) is calculated by multiplying the marginal product by the price of output (€20):
- MRP1 = 15 x €20 = €300
- MRP2 = 20 x €20 = €400
- MRP3 = 15 x €20 = €300
- MRP4 = 10 x €20 = €200
- MRP5 = 7 x €20 = €140
- MRP6 = 5 x €20 = €100
Thus, the marginal product and marginal revenue product values have been calculated.
Step 4
State at what point the law of diminishing marginal returns applies to labour in the above situation.
Answer
The law of diminishing marginal returns begins to apply after the third worker is employed. This is evident as the additional output produced by the fourth worker (15 units) is less than that produced by the third worker (20 units). Beyond this point, each additional worker adds less to total output than the previous one.
Step 5
How many workers should be employed in the above firm? Explain your reason.
Answer
The firm should employ 6 workers. This is because the marginal revenue earned from employing the sixth worker (€140) is equal to the marginal cost of employing that worker (€140). If fewer than 6 workers are employed, profits could be increased by hiring more labour. Hiring more than 6 workers would result in diminishing returns, leading to lower profitability.