1.

Write a brief note on returns to scale.

Answer»

The returns to scale can happen only in the long run as both the factors (labour and capital) can be changed. One special case, in the long run, occurs when both factors are increased by the same proportion or factors are scaled up. 

a. Constant returns to scale: When a proportional increase in all inputs results in an increase in output by the same proportion, the production function is said display constant returns to scale. 

b. Increasing returns to scale: When proportional increase in all inputs results in an increase in output by a larger proportion, the production function is said to display increasing returns to scale. 

c. Decreasing returns to scale: When a proportional increase in all inputs results in an increase in output by a smaller proportion, the production function is said to display decreasing returns to scale.

For example, if in a production process, all inputs get doubled. As a result, if the output gets doubled, the production function exhibits constant returns to scale, if output is less than doubled, exhibits decreasing returns to scale and if it is more than doubled, exhibits increasing returns to scale.



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