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CA Foundation · Business Economics · Theory of Production and Cost

Which of the following best explains why marginal product eventually diminishes as more units of a variable factor are added to fixed factors?

Marginal product diminishes because the fixed factor gets overcrowded as more variable units are added, so each extra unit has less of the fixed factor to work with. The cause is a poor factor ratio, not input prices, technology or demand.

  1. AThe price of the variable factor rises with every extra unit
  2. BThe fixed factor becomes overworked or crowded, reducing efficiency of additional variable unitsCorrect
  3. CTechnology deteriorates as output expands
  4. DConsumers demand less of the product

Explanation

With a fixed factor such as land or machinery, each additional worker has less of it to work with, so the fixed-to-variable ratio becomes poor. Input price, technology and demand do not enter the law, which is about physical productivity.

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