a) Why do increasing returns to scale occur? b)why do decreasing returns to scale occur?

a) Why do increasing returns to scale occur?

b)why do decreasing returns to scale occur?

Expert Solution

a. Increasing returns to scale.

The increasing return's of scale refers to the Increase in the productivity level in accordance to an increase in factor's of production.
An increasing return's to scale is said to occur when the productivity or the output Increases more than the Increase in inputs used.
A firm becomes more efficient when it experiences increasing return's to scale.
For example: if a firms inputs used for production Increases by 5%, it is said to experience an increasing return's to scale if its output Increases by 6% which is more than the increase in the percent of inputs used.

b. Decreasing returns to scale.

Decreasing returns to scale refers to the decrease in productivity level in accordance to an increase in the factors of production.
Decreasing returns to scale is said to occur when the productivity or output decreases when the number of inputs Increase during the production process.
When a firm faces decreasing returnsr to scale it becomes more inefficient.
For example : when the firms inputs Increase by 4 times and the outputs decrease by 2 time, the firm is said to experience a decreasing return's to scale.

Rahul Sunny answered 1 year ago

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