The law of diminishing returns is applicable to the__________

Analyze the question: The question asks what the law of diminishing returns applies to. The law is about what happens to output when you change the quantity of one input.

Explain the concept: The law of diminishing returns (also called the law of variable proportions) states that if you keep adding units of a variable factor (such as labour) to a fixed quantity of other factors (such as land or capital), the extra output from each additional unit will eventually start to fall.

Step-by-step solution:

1. In the short run, at least one factor is fixed, such as land, plant, or machinery.
2. Another factor, usually labour, is variable, meaning we can increase or decrease it.
3. As more variable input is added to the fixed input, the marginal product of the variable input rises at first, then reaches a peak and begins to fall.
4. This fall in marginal product is the diminishing returns. It is observed in the variable factor, because that is the input being increased.

Checking the options:

• A. Fixed inputs: these are held constant, so they are not what is being varied. Wrong.
• B. Variable factors of production: this is where the extra units are added and where the declining marginal returns show up. Correct.
• C. Plants and machinery: these are typical fixed factors in the short run. Wrong.
• D. Equipment and other capital: these are also usually fixed in the short run. Wrong.

Example: A farmer in Benue has 1 hectare of land (fixed). One worker produces 10 bags of yam, two workers produce 24, and three workers produce 32. The added output from the third worker is only 8 bags, less than the 14 from the second. More workers on the same fixed land means diminishing returns to labour.

Exam tip: Remember "Diminishing returns happen to the VARIABLE input, because the FIXED input is what makes it happen." If an option says "variable factor," it is usually the answer to this kind of question.