Question

The principle of adding one more unit of input to increase production as long as the value of output is greater than the cost of input is known as:

• A. Opportunity cost principle
• B. Principle of comparative advantage
• C. Law of diminishing marginal returns
• D. Time comparison principle

Hint:

Exam Tip: The decision rule for profit maximization is:
Use an input if: Value of Marginal Product (VMP) \(>\) Marginal Factor Cost (MFC).
This is a practical application of the opportunity cost principle.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
This question tests the understanding of core economic principles used in farm management and production economics.

Step 2: Analyzing the Statement:
The statement says: "adding one more unit of input to increase production as long as the value of output is greater than the cost of input."
This describes the process of comparing the additional benefit (value of output) with the additional cost (cost of input).
This is the fundamental decision rule for profit maximization in production.
The principle states that you should continue to increase input use as long as the marginal benefit exceeds the marginal cost.

Step 3: Evaluating the Options:
Let's define each principle:
• (A) Opportunity Cost Principle: This principle states that the true cost of any decision is the value of the next best alternative forgone. The decision rule of comparing added returns with added costs is a direct application of this principle. You are choosing to use an additional unit of input, and its opportunity cost is what you could have gotten by using it elsewhere.
• (B) Principle of Comparative Advantage: This is about specializing in the production of goods where a country or individual has a lower opportunity cost compared to others. It is a principle of trade.
• (C) Law of Diminishing Marginal Returns: This states that as more and more of a variable input is added to a fixed input, the additional output (marginal product) will eventually decrease. This law explains the shape of the production function but doesn't define the decision rule for input use.
• (D) Time Comparison Principle: This relates to comparing costs and benefits over time (e.g., in investment decisions).

Step 4: Final Answer:
The principle of adding input as long as the value of output exceeds the cost of input is the Opportunity Cost Principle. Therefore, option (A) is correct.