CFA Practice Question

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CFA Practice Question

The principle of diminishing returns says that ______

A. consumer loyalty is constantly decreasing.
B. all things being equal, your dollars never buy all the things they previously could have.
C. if inputs are reduced, output will remain constant.
D. all things being equal, as an input is increased, output increases, but at a decreasing rate.
E. as you add inputs to a process, you always get more output.
Correct Answer: D

According to the principle of diminishing marginal returns, increases in inputs result in increases in output, but the increases in output occur at a diminishing rate. For example, a typical garden can only grow so much food. Large amounts of inputs (fertilizer, water, etc.) will increase the amount of food produced, but as you increase the amounts of the inputs, you get smaller and smaller increases in the amount of food produced.

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