1. that an expansion of one type of capital holding the other types constant will cause its marginal product to fall.
2. that an expansion of one type of capital holding the other types constant will cause the marginal products of those other types of capital to rise.
3. that a contraction of one type of capital relative to other types of capital will cause the marginal product of the contracting type to rise relative to the marginal products of the expanding types.
4. that all of the above are true.
Choose the correct option.
The correct answer is option 4. The principle of diminishing returns kicks in whenever one input in the production function (one type of capital in our analysis) expands relative to one or more other inputs. The marginal product of the input that is expanding relatively will always fall relative to the marginal product of the relatively contracting input. If one input is constant, its marginal product will always rise as another input expands and the latter's marginal product will always fall.
Constant returns to scale holds when a proportional expansion of all inputs leads to an equiproportional expansion of output, with the marginal products of all factors remaining unchanged. decreasing returns to scale will hold if a proportional expansion of all inputs leads to less than proportional expansion of output. In this case the marginal products of all inputs will fall. And increasing returns to scale will hold if a proportional expansion of all inputs leads to a greater than proportional expansion of output. The marginal products of all the inputs will rise in this case.
If the returns to scale were not constant, it would be possible for the marginal product of a relatively contracting input to fall if the expansion of all inputs was great enough and there were decreasing returns to scale. Similarly, it would be possible for the marginal product of a relatively expanding input to rise if the expansion of all inputs was great enough and there were increasing returns to scale.