The Law of Diminishing Returns and Average Cost. ... The fixed costs of capital are high, but the variable costs of labor are low, so costs increase more slowly than output as production increases. As long as the marginal cost of production is lower than the average total cost of production, the average cost is decreasing.

Diminishing marginal returns occurs when the addition of one more unit of input (such as labor or capital) leads to a smaller increase in output compared to previous units of input. In other words, the marginal product of each additional unit of input decreases as more units are added.

Explanation:
When the marginal product starts to diminish, it means that the output gained from each additional unit of input is decreasing. This can happen due to various reasons, such as overcrowding of resources or inefficiencies in the production process. As a result, the cost of producing each additional unit of output increases.

Increasing marginal costs:
As the marginal product decreases, the marginal cost increases. Marginal cost refers to the additional cost incurred in producing one more unit of output. When the marginal cost increases, it means that more resources are required to produce each additional unit of output. This could be due to the need for additional labor, machinery, or other inputs.

Decreasing average fixed costs:
Average fixed costs refer to the fixed costs per unit of output. These costs do not change with the level of production. Therefore, diminishing marginal returns do not directly impact average fixed costs.

Decreasing average variable costs:
Average variable costs refer to the variable costs per unit of output. These costs vary with the level of production. When diminishing marginal returns occur, the marginal cost increases, leading to an increase in average variable costs.

Conclusion:
In summary, diminishing marginal returns imply increasing marginal costs and increasing average variable costs. Therefore, the correct answer is option 'C' - Increasing marginal costs.

C