Suppose Farmer Smith hires 4 workers and leases 2 tractors and 15 hectares of farmland for one growing season,and produces 120 000 bushels of crop.The next year he hires 8 workers and leases 4 tractors and 30 hectares of farmland,and produces 210 000 bushels of crop.This firm (the farmer)is exhibiting returns to scale.
A)increasing
B)constant
C)variable
D)marginal
E)decreasing

Question

Quizplus · Accepted Answer

Returns to scale refers to the relationship between inputs and outputs when all inputs are increased proportionally. If output increases at a greater rate than inputs, there are increasing returns to scale. If output increases at the same rate as inputs, there are constant returns to scale. If output increases at a lower rate than inputs, there are decreasing returns to scale.

In this scenario, Farmer Smith increased inputs (workers, tractors, and land) by a factor of 2 but only increased output by a factor of (210,000 / 120,000 =) 1.75. This means that output did not increase at the same rate as inputs, indicating decreasing returns to scale. Therefore, the best choice is (E) decreasing.

Suppose Farmer Smith Hires 4 Workers and Leases 2 Tractors