Question

The "law of diminishing returns" applies to _______.

• A. short run only
• B. long run only
• C. both short run and long run
• D. neither short run nor long run

Answer 1

Answer: (A)

short run only

The law of diminishing returns only applies in the short run because it is only possible for the law of variable proportions to operate under specific conditions.

1. The state of technology is given and remains unchanged.

2. It is assumed that some inputs are fixed while others are variable. 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).

These conditions only exist in the short run.