8. Can a production function have diminishing marginal returns to a factor of production and constant...

8. Can a production function have diminishing marginal returns to a factor of production and constant returns to scale simultaneously? Why or why not?

Expert Solution

Diminishing returns and returns to scale are completely different , so it is quite possible to have both diminishing returns to, say, labour and constant returns to scale at the same time. Diminishing returns to a single factor occurs because all other inputs are fixed. As more and more of the variable factor is used, the additions to output or the increase in output due to extra variable factor employed eventually become smaller and smaller because there are no increases in the other factors. The concept of returns to scale, deals with the increase in output when all factors are increased by the same proportion. While each factor by itself exhibits diminishing returns, output may more than double, less than double, or exactly double when all the factors are doubled. So it is possible that the output increases in the same proportion in which the inputs are increased and hence, this will exhibit constant returns to scale.

Rahul Sunny answered 9 months ago

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