Assume that there are decreasing returns to capital, decreasing returns to labour, and constant returns to scale. Now suppose that both capital and labour increase by 10%. Given this information, we know that output (Y) will:
A) not change.
B) increase by 10%.
C) increase by more than 10%.
D) increase by less than 20% but more than 10%.
E) increase by less than 10%.

Question

Quizplus · Accepted Answer

Given constant returns to scale, if all inputs (capital and labour) are increased by the same percentage (10% in this case), output (Y) will increase by that same percentage, which is 10%.

Assume That There Are Decreasing Returns to Capital, Decreasing Returns