Which of the following statements is correct if constant returns to scale are present? A doubling...

Which of the following statements is correct if constant returns to scale are present?

A doubling of inputs will lead to output more than doubling.

A doubling of inputs will lead to output also doubling.

A doubling of output will lead to inputs more than doubling.

Output remains constant irrespective of inputs.

Solutions

Expert Solution

A doubling of inputs will lead to output also doubling is called constant returns to scale.

Why this happens?

Actually there are 3 kinds of returns to scale :

1. Increasing returns to scale,

2. Diminishing returns to scale,

3. Constant returns to scale,

Increasing returns to scale : It occurs when suppose if we double the input, the output increases more than double. This happens because when we expand our unit or business the factors of production are undivisable. Means they will be available in a certain quantity. So, output in initial stages increases more then inputs employed.
Constant returns to scale : Now increasing returns will not continue indefinitely. As our unit expands further there are some factors like technology, information, divisibility of labor, etc due to which the returns start to be constant as whatever we add as input we get it back in the form of output.
Diminishing returns to scale : when our unit is further expanded, our output begins to diminish and we get diminishing returns to scale.

Rahul Sunny answered 1 year ago

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