Question

In the long​ run, a firm is flexible in choosing all its​ inputs, so diminishing marginal returns does not apply.

A. True
B. False

Answer 1

In the long run, all inputs are variable, allowing firms to choose the optimal capital stock and avoid diminishing marginal returns, which occur due to fixed inputs and are thus a short-run phenomenon.

Option 'b' is the correct.

Step-by-step explanation:

In the context of production theory, the question addresses whether the concept of diminishing marginal returns applies in the long run. The assertion is that in the long run, a firm has flexibility in choosing all its inputs, which implies that diminishing marginal returns do not occur.

This is because the phenomenon of diminishing marginal returns is associated with one or more fixed inputs, which create bottlenecks in production, leading to decreased additional output per unit of the variable input.

In the long run, all inputs can be adjusted, allowing firms to avoid these bottlenecks by choosing the optimal capital stock and production technology to produce their desired level of output efficiently.

Therefore, diminishing marginal returns is a concept that primarily applies in the short run, where at least one input is fixed.

The flexibility in the long run allows firms to circumvent this issue by adjusting all input levels, thereby aligning with the principles of long-run production optimization.