A firm that operates in Stage III of the short-run production function
A)has too much fixed capacity relative to its variable inputs.
B)has too little fixed capacity relative to its variable inputs.
C)has greatly overestimated the demand for its output.
D)should try to increase the amount of variable input used.

Question

Quizplus · Accepted Answer

In Stage III of the short-run production function, the firm is experiencing diminishing returns to the variable input. This means that the firm is producing less and less output for each additional unit of the variable input. In order to maintain or increase output, the firm needs to add more fixed capacity (such as machinery or equipment) relative to its variable inputs. Thus, the best choice is B, as the firm has too little fixed capacity relative to its variable inputs.

A Firm That Operates in Stage III of the Short-Run