The term diminishing returns refers to a:

A) falling interest rate that can be expected as one's investment in a single asset increases.
B) reduction in profits caused by increasing output beyond the optimal point.
C) decrease in total output due to the firm hiring uneducated workers.
D) decrease in the extra output due to the use of an additional unit of a variable input when all other inputs are held constant.

Question

Theodora Vukovic · Accepted Answer

Final Answer : D, Explanation :  Diminishing returns occurs when the use of an additional unit of a variable input results in a smaller increase in output than the previous units of the same input, provided that all other inputs are held constant. This is due to the fact that there is a fixed amount of other essential inputs, such as capital, technology, or management, available in the production process, and as the use of a variable input, such as labor, increases, the marginal physical product, or the extra output produced by each additional unit of the variable input, eventually declines. In other words, beyond a certain point, adding more labor to a fixed capital stock or a given technology may lead to inefficiencies, such as congestion, supervision, or coordination, that offset the benefits of specialization, division of labor, or economies of scale. Therefore, firms should aim to hire an optimal amount of variable input that maximizes their profit or minimizes their cost, rather than blindly increasing their input usage regardless of the return on investment.

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