Which of the following best describes the law of diminishing returns?

• A. Increasing all inputs by the same proportion leads to a less than proportional increase in output.
• B. As more inputs are used, total output always increases at an increasing rate.
• C. As additional units of a variable input are added to fixed inputs, the marginal product of the variable input eventually decreases.
• D. The average product of all inputs always remains constant as more inputs are added.

Answer: (C)

Verified step by step guidance

1. Understand that the law of diminishing returns applies in the context of production where at least one input is fixed while 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 or land), the additional output produced by each new unit of the variable input will eventually decrease.
3. Note that this means the marginal product (the extra output from one more unit of input) initially may increase but will start to decline after a certain point, even though total output may still be increasing.
4. Distinguish this from returns to scale, which involve increasing all inputs proportionally and relate to how output changes in response to scale changes, not the marginal product of a single input.
5. Therefore, the best description of the law of diminishing returns is: 'As additional units of a variable input are added to fixed inputs, the marginal product of the variable input eventually decreases.'