Final answer:
As the level of activity increases, the output generally exhibits diminishing returns, where the output initially increases but then decreases. This is seen in various economic contexts, such as in short-run production processes where adding more workers leads to diminishing marginal productivity.
Step-by-step explanation:
In economics, as the level of activity increases, the output typically exhibits diminishing returns. Initially, increasing the level of activity leads to an increase in output, but at some point, the additional output gained from each added unit of activity becomes smaller and smaller.
For example, in the short run production process, as the number of workers increases, the output increases, but at a diminishing rate. Eventually, there comes a point where adding more workers leads to a decrease in output.
Therefore, the correct answer is option 1) The output increases initially but then decreases, indicating diminishing returns.