TutorOn by Sanath Withanage

Question:

The ‘Law of Diminishing Returns’ states,
(1) as the size of a plant increases, its marginal product eventually decreases.
(2) as the size of a plant increases, its average cost eventually decreases.
(3) as a firm uses more of a variable input, given the quantity of fixed inputs, its marginal product eventually decreases.
(4) as a firm uses more of a variable input, given the quantity of fixed inputs, its average cost eventually decreases.
(5) as a firm uses more of a fixed input, given the quantity of variable inputs, its marginal product eventually decreases.

Correct Answer:

(3)

Answer Explanation:

The Law of Diminishing Marginal Returns is a short-run concept. It dictates that adding consecutive units of a variable factor (like labour) to a fixed factor (like land or machinery) will eventually result in the extra output generated by each new worker (the Marginal Product) decreasing.

Topic: Production Year: 2017