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

Question

Quizplus · Accepted Answer

The concept of a representative firm is most useful when there are constant returns to scale, meaning that doubling all inputs will exactly double the output. This assumption simplifies the analysis of the economy by allowing the behavior of a single, average firm to represent the behavior of all firms in the economy.

The Construct of a Representative Firm Is Most Helpful in Describing