Final answer:
Diminishing marginal returns occur when the b. marginal product is falling but remains positive, indicating that the rate of output increase is declining as more labor is added to a fixed amount of capital.
Step-by-step explanation:
When a firm experiences diminishing marginal returns, option b is correct: marginal product is falling but is likely to still be positive. This means that while each additional unit of labor is still contributing to total production, the increment of output that each additional worker contributes is decreasing. It's important to clarify that diminishing marginal returns do not imply that total output is decreasing—only that the rate of output increase is declining.
The concept of diminishing marginal productivity is a hallmark of the law of diminishing marginal product. It suggests that, after a certain point, employing more labor will result in smaller increases in output due to the constraints of fixed capital or resources, and less efficiently utilized labor. This is reflected in a production function that is initially downward-sloping, indicating increasing marginal returns, but eventually it turns upward-sloping as marginal returns diminish.
If we hold total cost constant and increase production, profits at every output level would increase only up to the point where each unit's cost is covered by revenue it generates. Beyond this point, if marginal costs exceed marginal revenue, the firm will start to see reduced profits for each additional unit produced. The optimal level of production is where marginal revenue (MR) equals marginal cost (MC).