4. (a) If a production function exhibits increasing returns to scale and the quantity of all...

4. (a) If a production function exhibits increasing returns to scale and the quantity of all inputs is doubled, what happens to output? (b) If a production function exhibits increasing returns to scale and the scale of output is doubled, what happens to the average cost per unit produced

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Expert Solution

a)when the production function exhibits an increasing returns to scale when the output increases more than changes in the output.Thus when quantity of all inputs gets doubled when the production function exhibits an increasing returns to scale then output will increase more than double.In the increasing returns to scale the inputs such as the factors of production such as land ,labor and capital increases then there will be more than proportionate increase in the output

(b):if the production function exhibits increasing returns to scale and scale of output increase the average cost per unit will start decreasing.When there constant returns to scale of production the average cost of production remains constant.If there is an increasing returns to scale then the average cost of production will fall and if there is an decreasing returns to scale then average cost of production will increase

Rahul Sunny answered 1 year ago

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