Ben publishes a daily newspaper in Philadelphia, and he wants to become one of the most popular newspapers in the country. He plans to hire his rivals’ most popular columnists to increase his readership and lessen theirs. Hiring The Wall Street Journal’s Alex Hamilton increases Ben’s readership by 100,000 readers per day and costs the Journal 50,000 daily readers. Hiring USA Today’s Pat Henry nets Ben another 70,000 new readers and costs USA Today 55,000 readers. This continues until Ben hires a sixth new columnist, which only earns him 5,000 new daily readers.
Ben’s business plan is demonstrating which economic principle?
Explanation
Answer: B - Ben’s business plan demonstrates the law of diminishing returns. The law of diminishing returns states that when one factor of production is increased (in this case, the number of popular columnists on staff) while other factors of production remain the same, the returns on that increase will diminish over time. The marketplace is only so large, and the marketshare that a product can achieve likewise has a limit. In Ben’s case, there are only so many people who are going to read his newspaper, no matter how many popular columnists he hires. Eventually, his plan to hire popular columnists away from his rivals would become counterproductive, because each successive hire would increase his readership by fewer daily readers than the previous hire. Ultimately, one of two things would happen. The new columnists would eventually stop earning Ben enough new readers to offset the expense of paying the columnists’ salaries. Or the multiple new columns could cause his production to become inefficient. A newspaper should only contain so many pages per day if the publisher wants to earn enough revenue to exceed his production costs (turn a profit). If Ben hired 20 new columnists, he would either have to increase the page count of his newspaper (thereby increasing other production costs) or create a publishing schedule that leads to each columnist publishing once or twice a month, which would probably not sustain the readership that followed a particular writer who would be expecting to see his columns on a regular and frequent basis.
