In the context of a production function, what does the law of diminishing marginal returns state?

• A. As more units of a variable input are added to fixed inputs, the marginal product of the variable input eventually decreases.
• B. When a firm increases output, its average total cost always rises because marginal cost always rises.
• C. As more units of all inputs are increased proportionally, output increases less than proportionally in the long run.
• D. As more units of a variable input are added to fixed inputs, total output eventually begins to fall immediately after the first unit is added.

Answer: (A)

Verified step by step guidance

1. Understand that the law of diminishing marginal returns applies to the short run, where at least one input is fixed and others are variable.
2. Recognize that the law states: as you add more units of a variable input (like labor) to fixed inputs (like capital), the additional output produced by each new unit of the variable input will eventually decrease.
3. Note that initially, adding more of the variable input may increase total output at an increasing rate, but after a certain point, the marginal product (additional output from one more unit of input) starts to decline.
4. Distinguish this from total output behavior: total output may still increase but at a decreasing rate, and it does not immediately fall after the first unit is added.
5. Remember that this concept is different from statements about average total cost or proportional increases in all inputs, which relate to other economic principles like economies of scale or cost curves.