Question

Which stage of production will firms typically want to be operating in ?

1)Stage I - Increasing returns

2)Stage II- diminishing returns

3)Stage III- negative returns

4)Stage I or II- increasing or diminishing returns

Answer 1

2) Stage II- diminishing returns

(This stage is also known as economic region. In stage 1, total product, marginal product, and average product all are increasing as firms add more of variable factor to the fixed factor. So, firms pass through this stage. In stage III, there are negative returns, total product is declining and returns are negative as cost is greater. In stage II, total product is increasing at a decreasing rate, marginal returns are declining but positive. So, employment of additional variable factor adds to taotal output. So, firms operate in the second stage as total output is increasing.)