The marginal product of an input initially rises and then after a certain level of employment, it starts falling, thus MP curve looks like an inverse 'U'-shaped curve. This condition is under _____.

Law of Variable Proportions.

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

The Law of Variable Proportions (also called the Law of Diminishing Marginal Returns) applies in the short run, when one factor (like labour) is variable while others (like capital) are fixed.

According to this law:

• Initially, as more units of the variable factor are employed, the Marginal Product (MP) increases due to better utilization of the fixed factor (increasing returns).

• After a certain point, MP reaches a maximum and then begins to decline as the fixed factor becomes a limitation (diminishing returns).

Thus, the MP curve takes the shape of an inverse 'U', showing first rising and then falling marginal product.