Future Business Leader Achievments (FBLA) Economics Practice Exam

What is the direct result of diminishing returns?

1. Higher total fixed costs

2. Reduced output levels

3. Higher costs per unit of output

4. Reduced total revenue

The correct answer is: Higher costs per unit of output

The concept of diminishing returns occurs when increasing the quantity of a single factor of production, while keeping other factors constant, results in smaller increases in output after a certain point. This principle often leads to higher costs per unit of production as more inputs are added. When diminishing returns set in, each additional unit of input contributes less than the previous one to overall output. Consequently, firms may find that their costs for additional units of production rise, leading to higher costs per unit. This is because the efficiency of production declines, and to produce the same amount or slightly more, they must invest more resources and incur greater costs for each unit manufactured. In contrast, the other choices reflect results that do not directly correlate with the phenomenon of diminishing returns. For instance, while reduced output levels might occur if the inputs are not managed properly, it is not a universal outcome of diminishing returns. Higher total fixed costs also do not stem from this concept, as fixed costs remain constant regardless of production levels. Total revenue could be influenced by various factors, including market demand, pricing, and overall production efficiency, making changes in total revenue not a direct result of diminishing returns.