In Example 6.5 in the book, the authors use the observed production data from the U.S. carpet industry to show that small firms likely have constant returns to scale and that large firms likely have increasing returns to scale. Are returns to scale in this industry likely to continue increasing as these firms become even larger?
A) Yes, the marginal products of labor and capital are known to be positive at all levels of output in the U.S. carpet industry, which implies continued increasing returns to scale.
B) Yes, increasing returns are always observed in other countries that produce carpeting on large scale.
C) No, the authors predict that returns to scale in carpet production will likely decline at some point.
D) The authors do not provide any comments on this issue.

Question

Quizplus · Accepted Answer

The authors predict that returns to scale in the U.S. carpet industry will likely decline at some point because they argue that the observed increasing returns to scale for large firms are due to market power and not technological advantages. As firms become even larger, the authors speculate that they will face diminishing returns and may even suffer from diseconomies of scale. Therefore, it is unlikely that returns to scale will continue to increase indefinitely.