Which of the following is true of a firm that faces increasing returns to scale?
A) An increase in the quantity of one input will increase output by a greater proportion.
B) As the quantity of all inputs are increased, the average cost of production will increase.
C) A given increase in the quantity of all inputs will increase output by a greater proportion.
D) As the quantity of one input is increased, its marginal product will increase at an increasing rate.
E) As the quantity of one input is increased, the marginal cost of production will decline.

Question

Quizplus · Accepted Answer

Increasing returns to scale means that a proportional increase in all inputs will lead to a greater than proportional increase in output, thus choice C is correct. An increase in the quantity of one input will lead to a proportionate increase in output when a firm operates under constant returns to scale (choice A), while average cost of production will decrease with increasing returns to scale (not increase as stated in choice B). The marginal product of an input will eventually decrease as more of it is added, regardless of the type of returns to scale (not increase as stated in choice D). Similarly, the marginal cost of production may increase or decrease with increasing quantity of an input depending on the type of returns to scale, so choice E is not necessarily true.

Which of the Following Is True of a Firm That