Under which of the following circumstances is a firm most likely to experience diminishing marginal returns?

• A. When a firm operates on the production possibilities frontier and achieves productive efficiency
• B. When the marginal product of labor increases as more workers are hired
• C. When all inputs are increased proportionally and output increases at the same rate
• D. When additional units of a variable input are added to a fixed input and output increases at a decreasing rate

Answer: (D)

Verified step by step guidance

1. Understand the concept of diminishing marginal returns: it occurs when adding more units of a variable input (like labor) to fixed inputs (like capital) results in smaller increases in output.
2. Identify the conditions for diminishing marginal returns: the key is that one input is fixed while the other input is variable, and the marginal product of the variable input starts to decline.
3. Analyze each option by checking if it fits the condition of fixed and variable inputs and whether output increases at a decreasing rate.
4. Recognize that operating on the production possibilities frontier implies efficient use of all resources, not necessarily diminishing returns from a variable input.
5. Conclude that diminishing marginal returns happen specifically when additional units of a variable input are added to a fixed input and output increases at a decreasing rate, matching the last option.