The construct of a representative firm is most helpful in describing the behavior 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 labor is increasing in the amount of labor input.

Question

Quizplus · Accepted Answer

A representative firm assumes that all firms in the economy behave the same way and have the same production technology. This assumption works best when there are constant returns to scale, meaning that the increase in output is proportional to the increase in inputs. In this case, individual firms could be viewed as small replicas of the representative firm, making it easier to describe the behavior of all firms in the economy.

The Construct of a Representative Firm Is Most Helpful in Describing