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Questions and Answers
What does the law of returns to scale examine?
What does the law of returns to scale examine?
The impact of changes in the scale of production on the production quantity when all inputs increase proportionally.
Which of the following is a possibility of returns to scale?
Which of the following is a possibility of returns to scale?
- Total output decreases proportionally to the inputs
- Total output increases at a higher rate than the inputs proportionally (correct)
- Total output increases proportionally to the inputs (correct)
- Total output increases at a lower rate than the inputs proportionally (correct)
What are increasing returns to scale?
What are increasing returns to scale?
When the proportional increase in inputs leads to a larger increase in total output.
What are constant returns to scale?
What are constant returns to scale?
What are decreasing returns to scale?
What are decreasing returns to scale?
Increasing returns to scale can occur when the total output increases proportionally to the inputs.
Increasing returns to scale can occur when the total output increases proportionally to the inputs.
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Study Notes
Laws of Returns to Scale
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The law of returns to scale examines the relationship between changes in the scale of production and the resulting output. This is when all inputs are proportionally increased, influencing the total output's rate of growth.
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Increasing returns to scale: This happens when a proportional increase in inputs leads to a larger increase in total output. Doubling inputs results in more than doubling output.
- This is demonstrated by isoquant curves which are further from the origin than previous curves, showing that as inputs (labor and capital) grow proportionally, output also increases but at a faster rate.
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Constant returns to scale: Here, a proportional increase in inputs results in a proportionate increase in total output. Doubling the inputs leads to a doubling of output.
- This is depicted by isoquant curves with the same slope throughout, showing that the relationship between inputs and output remains constant for all combinations.
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Decreasing returns to scale: This occurs when a proportional increase in inputs leads to a smaller (less than proportional) increase in total output. Doubling the inputs results in output increasing less than doubling output.
- This is shown by isoquant curves that are further from the origin with a decreasing slope. This signifies that for each unit increase in labor or capital, the additional output increases, but at a slower rate.
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