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CMA Foundation · Fundamentals of Business Economics and Management · Theory of Production

The Law of Variable Proportions (Law of Diminishing Returns) in the short run operates on the assumption that:

The law of variable proportions assumes technology is constant and at least one factor stays fixed while another factor is varied. It is a short-run law. Changing all inputs together is returns to scale, a long-run idea, so those options do not describe it.

  1. AAll factors of production are increased in the same proportion
  2. BTechnology is constant and at least one factor is kept fixed while another is variedCorrect
  3. CAll factors are variable and the scale of production changes
  4. DThe price of the product changes as output expands

Explanation

The law studies what happens to output when one variable input is added to fixed quantities of other inputs, with technology unchanged. Option A and C describe returns to scale, which is a long-run concept where all factors change. Product price is not an assumption of the law.

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