The construct of a representative firm is most helpful in describing the behaviour of all of the firms in the economy when
A) there are constant returns to scale.
B) there are increasing returns to scale.
C) there are decreasing returns to scale.
D) the marginal product of labour is increasing in the amount of labour input.
E) the marginal product of labour is decreasing in the amount of labour input.

Question

Quizplus · Accepted Answer

The representative firm assumes that all firms in the economy are identical and behave in the same way. This assumption is most helpful when there are constant returns to scale, meaning that the firm's output does not change proportionally with changes in inputs. In this case, the production technology is the same for all firms and the representative firm is a good approximation of the behaviour of all firms in the economy.

The Construct of a Representative Firm Is Most Helpful in Describing