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CA Foundation · Business Economics · Theory of Production and Cost

In the three stages of the Law of Variable Proportions, a rational producer will operate in Stage II because:

A rational producer operates in Stage II because marginal product is positive but declining, and total product keeps rising until it reaches its maximum. Stage I underuses the fixed factor and Stage III has negative marginal product, so neither is efficient.

  1. ATotal product is falling and marginal product is negative
  2. BMarginal product is rising and average product is rising
  3. CMarginal product is positive but declining, and total product is still increasing up to its maximumCorrect
  4. DAverage product is zero and marginal product is at its maximum

Explanation

Stage II runs from the maximum of average product to where marginal product becomes zero. Here MP is positive and falling and TP keeps rising to its maximum. Stage I leaves fixed factors underused, and in Stage III MP is negative so adding labour reduces output.

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