With appropriate examples, define increasing returns to scale, decreasing returns to scale and constant returns to...

With appropriate examples, define increasing returns to scale, decreasing returns to scale and constant returns to scale.

(Please write out answer versus charting it)

Expert Solution

In the long run, all factors of production can be changed. The output also changes with the change in factors of production. The returns can be increasing returns to scale, constant returns to scale or diminishing returns to scale.

If the output increases more than proportionately to the increase in factors of production, then the firm is enjoying increasing returns to scale. If the factors of production, like labor, is doubled and if the output more than doubles, then the firm is said to be having increasing returns to scale.

If the output increases less than proportionately to the increase in factors of production, then the firm is having diminishing returns to scale. If factors of production are doubled, but the output increases less than double, then the firm is facing diminishing returns to scale. If there is 100 per cent increase in labor but output increases by 70%, this is a case of diminishing returns to scale.

If the output increases in the same proportion as increase in factors of production, the firm is enjoying constant returns to scale. If labor is doubled and output is also doubled, then the industry is facing constant returns to scale.

Rahul Sunny answered 2 years ago

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