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CMA Foundation · Fundamentals of Business Economics and Management · Utility, Wealth, Production

In the law of variable proportions, the stage in which a rational producer will operate is the stage where:

A rational producer operates in Stage II, where marginal product is positive but declining and total product is still increasing. Stage I underuses the fixed factor and Stage III has negative marginal product, so neither is chosen by a profit-seeking firm.

  1. AMarginal product is negative and total product is falling
  2. BAverage product is rising and marginal product exceeds it
  3. CMarginal product is positive but declining, and total product still risesCorrect
  4. DMarginal product is zero at the start of production

Explanation

Stage II runs from the maximum of average product to the point where marginal product is zero. Here MP is positive but falling and TP keeps rising to its maximum. Stage I leaves fixed factors underused, and Stage III has negative MP, so a rational producer avoids both.

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