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If as a result of 80 percent increase in all inputs, the output increases by 25 percent, this is a case of:
- a)Increasing return to scale
- b)Dec reasing return to fac tor
- c)Decreasing returns to scale
- d)Diminishing return to factor
Correct answer is option 'C'. Can you explain this answer?
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Most Upvoted Answer
If as a result of 80 percent increase in all inputs, the output increa...
Explanation:
The given scenario describes the effect of an 80 percent increase in all inputs on the output. This situation can be analyzed in terms of returns to scale, which refers to the change in output resulting from a proportional change in all inputs.
Decreasing Returns to Scale:
When all inputs are increased by a certain percentage, and the output increases by a lesser percentage, it is known as decreasing returns to scale. In this case, the increase in inputs is not being utilized efficiently, and as a result, the output is not increasing proportionally.
Let's see how to identify the type of returns to scale in this given situation:
Given, the increase in all inputs is 80 percent, i.e., the inputs are increased by 1.8 times.
The output increases by 25 percent, i.e., the output is increased by 1.25 times.
Now, we can calculate the ratio of the output increase to input increase, which is:
Output increase/Input increase = 1.25/1.8 = 0.69
Since the ratio is less than one, it indicates that the output is not increasing proportionally to the increase in inputs, and hence, this is a case of decreasing returns to scale.
Conclusion:
Therefore, the correct answer is option 'C' - Decreasing returns to scale.
The given scenario describes the effect of an 80 percent increase in all inputs on the output. This situation can be analyzed in terms of returns to scale, which refers to the change in output resulting from a proportional change in all inputs.
Decreasing Returns to Scale:
When all inputs are increased by a certain percentage, and the output increases by a lesser percentage, it is known as decreasing returns to scale. In this case, the increase in inputs is not being utilized efficiently, and as a result, the output is not increasing proportionally.
Let's see how to identify the type of returns to scale in this given situation:
Given, the increase in all inputs is 80 percent, i.e., the inputs are increased by 1.8 times.
The output increases by 25 percent, i.e., the output is increased by 1.25 times.
Now, we can calculate the ratio of the output increase to input increase, which is:
Output increase/Input increase = 1.25/1.8 = 0.69
Since the ratio is less than one, it indicates that the output is not increasing proportionally to the increase in inputs, and hence, this is a case of decreasing returns to scale.
Conclusion:
Therefore, the correct answer is option 'C' - Decreasing returns to scale.
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If as a result of 80 percent increase in all inputs, the output increases by 25 percent, this is a case of:a)Increasing return to scaleb)Dec reasing return to fac torc)Decreasing returns to scaled)Diminishing return to factorCorrect answer is option 'C'. Can you explain this answer?
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