Diminishing marginal returns implies :

Question

Accepted Answer

The correct option is 2:

Diminishing marginal returns, also known as the Law of Variable Proportions, states that when successive units of a variable factor (like labor) are added to a fixed factor (like capital), the marginal product (additional output) of the variable factor eventually begins to decline. Economically, a fall in marginal product means that each extra unit of input produces less output than the previous unit. Since marginal cost (MC) is the change in total cost resulting from producing one additional unit of output (MC = Change in Total Cost / Change in Output), if the output (Marginal Product) is diminishing while the price of the variable input remains constant, the cost of producing each additional unit of output must increase. Therefore, the onset of diminishing marginal returns is directly associated with the beginning of increasing marginal costs. This is why the MC curve slopes upwards after the point where marginal returns begin to diminish.

The incorrect option is 1:
Decreasing average variable costs (AVC) is typically associated with the phase of increasing marginal returns, where output is rising faster than costs. Once marginal returns start to diminish, marginal cost rises, pulling the average variable cost curve up as well, meaning AVC generally starts increasing, not decreasing.

The incorrect option is 3:
Average fixed costs (AFC) are calculated by dividing Total Fixed Cost by the quantity of output. Since Total Fixed Cost remains constant, as production (output) increases, AFC will always decrease. Diminishing marginal returns do not change the underlying principle that AFC declines continuously with greater output.

The incorrect option is 4:
Decreasing marginal costs occurs during the initial phase of production, where increasing marginal returns are at play. As output rises significantly with each added input, the cost per additional unit decreases. Diminishing marginal returns signifies the *end* of this phase and the beginning of the rising (increasing) marginal cost phase.