A firm uses only two inputs to produce its output.These inputs are perfect substitutes.This firm
A)must have increasing returns to scale.
B)must have constant returns to scale.
C)could have increasing returns to scale, constant returns to scale, or decreasing returns to scale.
D)must have decreasing returns to scale.
E)must have decreasing returns to scale in the short run and constant returns to scale in the long run.

Question

Quizplus · Accepted Answer

When inputs are perfect substitutes, the production function is linear and the returns to scale vary depending on the slope of the function. The slope can be positive (increasing returns), zero (constant returns), or negative (decreasing returns) depending on the relative costs of the inputs. Therefore, the firm could have increasing, constant, or decreasing returns to scale.

A Firm Uses Only Two Inputs to Produce Its Output