A Level Economics AQA Practice Exam

What does the Law of Diminishing Returns state?

1. Marginal returns will increase indefinitely

2. Eventually, adding more of a variable input will lower marginal returns

3. All inputs must be increased for production to grow

4. Economies of scale are always favorable

The correct answer is: Eventually, adding more of a variable input will lower marginal returns

The Law of Diminishing Returns states that as you continue to add more of a variable input to a fixed input, there comes a point when the additional output generated from that extra input will begin to decline. In simpler terms, while initially, adding more of a resource (like labor or raw materials) can lead to increased production, beyond a certain point, each additional unit of input results in less and less additional output. This principle is crucial in understanding production and efficiency within the context of economics, as it highlights the limits of productivity when inputs are increased without a proportional increase in other inputs. Understanding this law helps economists and producers make better decisions about resource allocation, optimizing production levels, and identifying the most efficient combinations of inputs. In contrast, the other options either misrepresent the relationship between inputs and outputs or address concepts that don't align directly with the Law of Diminishing Returns. For instance, the idea that marginal returns will increase indefinitely is contrary to the very essence of diminishing returns, as it ignores the point at which output starts to decline per additional unit of input.