Question

In the Law of Diminishing Returns, rational producer operates in:

• A. I Zone only
• B. II Zone only
• C. III Zone only
• D. Both II and III Zones

Hint:

Exam Tip:
Zone I: MP \(>\) AP (Increasing Returns)
Zone II: MP \(<\) AP, but MP \(>\) 0 (Diminishing Returns) - Rational Zone
Zone III: MP \(<\) 0 (Negative Returns) - Irrational Zone

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
This question tests knowledge of the three stages of production in the Law of Diminishing Returns (also known as the Law of Variable Proportions).

Step 2: The Three Stages of Production:
The Law of Diminishing Returns describes the behavior of output as one input is varied while others are held fixed. This gives rise to three stages of production:
• Stage I (Zone I): This is the stage of increasing marginal returns. Total product increases at an increasing rate. The average product is rising and reaches its maximum at the end of this stage.
_ _ _ _ Characteristics: MP \(>\) AP, both rising.
_ _ _ _ Producer's Decision: A rational producer would not stop here because by adding more input, average product is still increasing.
• Stage II (Zone II): This is the stage of diminishing marginal returns. Total product increases but at a diminishing rate. Both average product and marginal product are falling, but marginal product is still positive.
_ _ _ _ Characteristics: MP \(<\) AP, but MP \(>\) 0.
_ _ _ _ Producer's Decision: This is the rational zone for production. The producer will operate here to determine the optimal input level.
• Stage III (Zone III): This is the stage of negative marginal returns. Total product is declining. The marginal product is negative.
_ _ _ _ Characteristics: MP \(<\) 0.
_ _ _ _ Producer's Decision: A rational producer will never operate in this zone because adding more input actually reduces total output.

Step 3: Analyzing the Options:

• (A) I Zone only: Incorrect. A rational producer would continue to add input to increase average product.
• (B) II Zone only: Correct. This is the region of diminishing but positive returns, where profit maximization occurs.
• (C) III Zone only: Incorrect. Production should never take place here.
• (D) Both II and III Zones: Incorrect. Zone III is irrational.

Step 4: Final Answer:
A rational producer operates in Zone II only. Therefore, option (B) is correct.