Let's say you have 1000 HP.
If you get 4 armor, you get 10 EHP out of it.
If you get another 4 armor, you get 10 EHP out of it.
If you get another 4 armor, you get 10 EHP out of it.
If it were diminishing returns, it'd look more like this:
If you get 4 armor, you get 10 EHP out of it
If you get another 4 armor, you get 9 EHP out of it
If you get another 4 armor, you get 8 EHP out of it.
Even if you have 1000000000 armor, getting another 4 armor will ALWAYS give you 1% more of your base HP in EHP (in this case it is exactly 10 EHP if you have 1000 HP base.
Thus, it is not dimishing returns.
If you have 15000 HP you're pretty much guaranteed that no matter you're current armor, increasing armor some more will be better than getting HP.
The graph is misleading and the person who wrote it didn't choose his/her words carefully. You'll always see the same benefit from armor and it will always be based on your current HP. The graph is showing you the damage mitigation %, which is not the return on investment! The ROI is 1/(1-Mitigation) which turns that graph into a completely strait line.
The formula is perfect. It is neither exponential nor diminishing returns, and is IMO the ideal formula for defensive calculations.