The correct answer is: B. At least one factor of production is fixed.
The law of diminishing returns states that in all productive processes, adding more of one factor of production, while holding all others constant (ceteris paribus), will at some point yield lower incremental per-unit returns. The law of diminishing returns does not apply when all factors of production are variable, because in that case, the firm can simply increase all factors of production in the same proportion, and output will increase in the same proportion.
For example, if a firm has a fixed amount of land and a fixed amount of labor, and it increases the amount of capital, output will increase at first, but eventually, the amount of additional output produced by each additional unit of capital will decrease. This is because the land and labor are not being used as efficiently as they could be, and the firm is not getting the most out of its investment in capital.
The law of diminishing returns is an important concept in economics, and it has a number of implications for business decisions. For example, it suggests that firms should not increase production beyond the point at which the law of diminishing returns sets in, because doing so will lead to lower profits. Additionally, the law of diminishing returns suggests that firms should focus on using their resources efficiently, because doing so will allow them to produce more output with the same amount of resources.
Here is a brief explanation of each option:
- Option A: All factors of production can be varied. This is not the correct answer, because the law of diminishing returns can apply even when some factors of production are variable.
- Option B: At least one factor of production is fixed. This is the correct answer, because the law of diminishing returns states that in all productive processes, adding more of one factor of production, while holding all others constant (ceteris paribus), will at some point yield lower incremental per-unit returns.
- Option C: All factors of production are fixed. This is not the correct answer, because the law of diminishing returns can apply even when some factors of production are variable.
- Option D: Capital used in production is fixed. This is not the correct answer, because the law of diminishing returns can apply even when capital is not the only factor of production that is fixed.