Suppose that, in the isoquant-isocost diagram, with given relative factor prices, an Equilibrium input combination of 10 units of capital and 30 units of labor yields an output Level for the firm of 120 units. Suppose that, for this firm, at the same relative factor Prices but with a larger budget, an equilibrium input combination of 15 units of capital And 45 units of labor yields an output level of 160 units. Viewing these input-output Relationships, an economist would say that, in its production process, this firm Experiences
A) increasing returns to scale.
B) constant returns to scale.
C) decreasing returns to scale.
D) increasing returns to scale, constant returns to scale, or decreasing returns to scale -Cannot be determined without more information.

Question

Quizplus · Accepted Answer

The firm increases inputs by 50% (from 10 to 15 units of capital and from 30 to 45 units of labor), but output increases by only 33.33% (from 120 to 160 units), indicating decreasing returns to scale.

Suppose That, in the Isoquant-Isocost Diagram, with Given Relative Factor