According to the Law of Diminishing Returns, in a production function when more and more units of the variable factor are used, holding the quantities of a fixed factor constant, a point is reached beyond which

Q. According to the Law of Diminishing Returns, in a production function when more and more units of the variable factor are used, holding the quantities of a fixed factor constant, a point is reached beyond which

1. the marginal revenue will diminish
2. the average revenue will diminish
3. the marginal product will diminish
4. the marginal product will increase

Answer: the marginal product will diminish.

According to the Law of Diminishing Returns, in a production function when more and more units of the variable factor are used, holding the quantities of a fixed factor constant, a point is reached beyond which the marginal product will diminish.

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Law of Diminishing Marginal Returns

The law of diminishing marginal returns states that, at some point, adding an additional factor of production results in smaller increases in output. For example, a factory employs workers to manufacture its products, and, at some point, the company operates at an optimal level. With other production factors constant, adding additional workers beyond this optimal level will result in less efficient operations.

An example is a factory that has a fixed stock of capital, or tools and machines, and a variable supply of labor. As the firm increases the number of workers, the total output of the firm grows but at an ever-decreasing rate. This is because after a certain point, the factory becomes overcrowded and workers begin to form lines to use the machines. The long-run solution to this problem is to increase the stock of capital, that is, to buy more machines and to build more factories.

3 Stages of law of diminishing returns

• Stage I: Increasing Returns
• Stage II: Diminishing Returns
• Stage III: Negative Returns