CA Foundation · Business Economics · Theory of Production and Cost
According to the Law of Variable Proportions, a rational producer will operate in which stage of production?
A rational producer operates in Stage II, where marginal product is positive but declining and total product is still rising. Stage I leaves the fixed factor underused, and in Stage III extra input has negative marginal product and reduces total output.
- AStage I, where average product is rising
- BStage II, where marginal product is positive but declining and TP is still risingCorrect
- CStage III, where marginal product is negative
- DAny stage, since all stages give the same profit
Explanation
In Stage I the fixed factor is underused, so more variable input should be added. In Stage III, marginal product is negative and TP falls, so adding input reduces output. A rational producer therefore operates in Stage II, from the maximum AP to the point where MP becomes zero.
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