Final answer:
The firm is experiencing diminishing marginal returns, a phenomenon where each additional unit of input contributes less to the total output than the previous unit, reflecting the law of diminishing returns.
Step-by-step explanation:
When an additional unit of a variable input adds less to the total product than the previous unit, the firm must be experiencing diminishing marginal returns. This concept is a manifestation of the law of diminishing returns, which states that as additional increments of resources are added to producing a good or service, the marginal benefit from those additional increments will usually decline. This phenomenon occurs because, in the short run, at least one input is fixed, and as more of the variable input is added, its contribution to output inevitably falls. Marginal product changes are crucial in the stages of production to determine the optimal use of resources for generating maximum efficiency. While diminishing marginal returns refers to a short-run situation with one variable input and fixed capital, it should not be confused with economies of scale, which relate to the long-run cost curve where all inputs can be adjusted.