Exercises · Q7
Q.
A firm's labour, capital and resulting output at three successive scales are given below. Both inputs are doubled at each step. Identify the law of returns to scale operating (a) between the first and second rows, and (b) between the second and third rows.
| Labour | Capital | Output |
|---|---|---|
| 1 | 1 | 10 |
| 2 | 2 | 20 |
| 4 | 4 | 44 |
Puducherry TnboardTextbookSubjectiveImportance★★★★★
5% · 2/39 Questions
✓ Free question
- From (1,1) to (2,2): inputs increase by a factor of . Output increases by a factor of . Since the two ratios are EQUAL, output has grown in EXACTLY the same proportion as the inputs — this is Constant Returns to Scale.
- From (2,2) to (4,4): inputs increase by a factor of . Output increases by a factor of . Since , output has grown in a GREATER proportion than the inputs — this is Increasing Returns to Scale.
This firm therefore experiences Constant Returns to Scale at first, and then moves into Increasing Returns to Scale as it doubles its scale again — the reverse order from a firm that starts small and eventually runs into diseconomies, illustrating that there is no single fixed sequence a firm must follow; it depends on the specific technology and scale involved.
✓Final answer
(a) Constant Returns to Scale (output ratio input ratio ). (b) Increasing Returns to Scale (output ratio input ratio ).
Unlock everything free for 14 days
- Full step-by-step solutions
- Concept-first explanations
- Methods, shortcuts & mistakes
- PYQ mapping + timed mock tests
Full access for 14 days. No credit card required.