It is possible to have diminishing marginal returns to a single factor of production and constant...

It is possible to have diminishing marginal returns to a single factor of production and constant returns to scale at the same time. Discuss.

A.

The statement is true. As long as only one input has diminishing marginal returns, it is possible to have constant returns to scale.

B.

The statement is false. If an input exhibits diminishing marginal returns, then doubling that input will result in less than double the output.

C.

The statement is false. The terms 'marginal returns' and 'returns to scale' are interchangeable. Therefore, if the factors of production have diminishing marginal returns, then there are decreasing returns to scale.

D.

The statement is true. Diminishing marginal returns to a single factor applies to the short run when all other inputs are held fixed. On the other hand, returns to scales applies to the long run when all inputs can be increased.

Expert Solution

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Now first let us understand that diminishing marginal returns and constant returns to scale are two very different concepts . Diminishing marginal returns to a single factor occurs when other factors are constant or fixed in units . So here other factors are constant and only the variable factor is increased which results in lower marginal product over time .

Now constant returns to scale means all factors are increased in same proportion and the output gets increased in that proportion only . While each factor individually exhibits diminishing marginal returns , output may more than double, less than double, or exactly double when all the factors are doubled ( which gives rise to 3 different types of scales ) . So in returns to scale no input is fixed , all increased in same proportion .

Diminishing marginal returns is a short run phenomena , returns to scale is a long run phenomena .

So yes both are quite possible together .

Answer : D. The statement is true. Diminishing marginal returns to a single factor applies to the short run when all other inputs are held fixed. On the other hand, returns to scales applies to the long run when all inputs can be increased.

Rahul Sunny answered 7 months ago

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