Market Structure – Profit Maximization

(a) Explain in your own words how the law of diminishing returns will at some point yield lower per-unit returns. Additionally, explain its impact to profit maximization in a firm. (150 words)

(b) Give three real world examples of implicit costs associated with economic profit that are not included in this weeks materials.

 

 

Sample Solution

The law of diminishing marginal returns states that adding an additional factor of production results in smaller increases in output.  After some optimal level of capacity utilization, the addition of any larger amounts of a factor of production will inevitably yield decreased per-unit incremental returns. For example, if a factory employs workers to manufacture its products, at some point, the company will operate at an optimal level; with all other production factors constant, adding additional workers beyond this optimal level will result in less efficient operations.

NAc receive dopamine (DA) projections from the ventral tegmental area (VTA) (Björklund and Dunnett, 2007, Ikemoto, 2007, Morales and Margolis, 2017) and this pathway play a major role in motivated behaviours, reinforcement learning and reward processing (Hamid et al., 2016; Salamone and Correa, 2012; Schultz, 2016; Watabe-Uchida et al., 2017). Like any other process, there are negative feedback pathways to balance the projections and prevent overexpression of DA. This arise from various structures (Matsui et al., 2014) but recent studies show that NAc is the main source of this inhibitory input (GABAergic input) (Beier et al., 2015; Watabe-Uchida et al., 2012). There were few conflicting results on this with studies suggesting inputs from NAc to VTA to be disinhibiting (Bocklisch et al., 2013; Chuhma et al., 2011; Xia et al., 2011) and a recent study addressing that NAc synapse onto VTA GABA as well as DA neurons via GABA-A receptor (GABAAR) and GABA-B receptor (GABABR) respectively (Edward et al., 2017). This, however, also projects a different result compared to the study done by Paladini in 1999 where inhibitory responses from the striatum to DA neurons were blocked by GABA-A antagonist hinting at pathway mediated by GABA-A instead.

In this particular study by Hongbin et al. in 2017, the shell component of the NAc is further subdivided into medial shell (NAcMed) and lateral shell (NAcLat). D1-MSN in the NAcMed is found inhibiting NAcMed-projecting DA neurons via GABAAR while NAcLat-projecting DA neurons via GABABR. D1-MSNs in the NAcLat, on the other hand, projects onto VTA GABA to result in disinhibition of NAcL

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