If an increase in labour and capital of 10 per cent leads to output increasing by 10 per cent then, ceteris paribus, the economy is operating with:

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Quizplus · Accepted Answer

Constant returns to scale occur when a proportional increase in inputs results in the same proportional increase in output. In this case, a 10% increase in labour and capital leads to a 10% increase in output, which indicates that the production function has constant returns to scale. If there were increasing returns to scale, a 10% increase in inputs would lead to more than a 10% increase in output, and if there were decreasing returns to scale, a 10% increase in inputs would lead to less than a 10% increase in output. Economies of scale refer to the cost advantages of producing on a larger scale, but they are not directly related to the relationship between inputs and outputs.

If an Increase in Labour and Capital of 10 Per