Question

The hypothesis of eventually diminishing returns applies to production function ___________.

• A. having at least one fixed factor
• B. in the long run only
• C. in the very long run preferably
• D. in which inputs are applied in fixed proportions

Answer 1

Answer: (A)

having at least one fixed factor

Diminishing marginal returns follows from the law of variable proportions that are only applicable in the short run.

1. The state of technology is given and remains unchanged

2. It is assumed that some inputs are fixed while others are varied. As it is only then that the factor proportions can be changed.

3. It is assumed that technology is such that it is possible to change the factor proportions. The law will not apply in situations where the factors of production must be used in fixed proportions.

4. It is assumed that all the units of the variable factor are homogeneous and are equally efficient. (eg every worker hired is equally efficient).