Which of the following states that "The marginal product of a factor input initially rises with its employment level, but after reaching a certain level of employment, it starts falling"?

Law of Variable Proportions.

The correct answer is Option (2) → Law of Variable Proportions.

Law of Variable Proportions (or Law of Diminishing Marginal Returns): This law states that as more and more units of a variable input are added to a fixed input, the marginal product of the variable input will initially increase, reach a maximum, and then eventually decrease. 

Other options explained:

• Diminishing Returns to Scale: Refers to long-run production where all inputs are variable, and output increases less than proportionately.

• Law of Diminishing Marginal Rate of Substitution: Applies to consumer theory, describing how much of one good a consumer is willing to give up for another while maintaining the same level of satisfaction.

• Increasing Returns to Scale: Refers to long-run situations where output increases more than proportionately to input increases.