Suppose a firm uses 200 units of capital and 1000 workers to produce 10,000 units of output.When the firm employs 3000 workers and uses 600 units of capital,output increases to 45,000 units.This firm exhibits
A) Increasing returns to scale
B) Decreasing returns to scale
C) Constant returns to scale
D) Diminishing marginal returns

Question

Quizplus · Accepted Answer

Increasing returns to scale is when output increases proportionally more than inputs when all inputs are increased by the same proportion. In this case, when the firm increases both capital and labor by 3 times, the output increases by more than 4 times (from 10,000 to 45,000 units). Therefore, this firm exhibits increasing returns to scale.

Suppose a Firm Uses 200 Units of Capital and 1000