A firm that operates in Stage III of the short run production function has too much fixed capacity relative to its variable inputs. has too little fixed capacity relative to its variable inputs. has greatly overestimated the demand for its output. should try to increase the amount of variable input used.

has too little fixed capacity relative to its variable inputs

Explanation:

Stage III of the short-run Production Function refers to the point at which less units of output will be produced when extra units variables inputs are added, because there is a too little fixed capacity relative to its variable inputs.

The reason is that optimal production is achieved at the w point where marginal product (P) is equal to zero (i.e. MP = 0), and this is point where Stage II ends and Stage III begins in the short-run production function. As the enters this stage III, its fixed capacity becomes too little relative to its variable inputs.

Therefore, firm that operates in Stage III of the short run production function has too little fixed capacity relative to its variable inputs.