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Increase in all input leading to less than proportional increase in output is called ______:
- a)Increasing returns to scale
- b)Decreasing returns to scale
- c)Constant returns to scale
- d)Both increasing and decreasing returns to scale
Correct answer is option 'B'. Can you explain this answer?
Verified Answer
Increase in all input leading to less than proportional increase in ou...
The term returns to scale arises in the context of a firm's production function. If output increases by that same proportional change as all inputs change then there are constant returns to scale (CRS). If output increases by less than that proportional change in inputs, there are decreasing returns to scale (DRS).
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Increase in all input leading to less than proportional increase in ou...
Decreasing returns to scale is a concept of economics that describes a situation where an increase in all inputs leads to less than a proportional increase in output. In other words, when a firm increases its production capacity by adding more inputs of labor, capital, and other resources, the output increases at a decreasing rate. This phenomenon is also known as diminishing returns or diseconomies of scale.
Factors affecting decreasing returns to scale:
1. Overcrowding: When too many workers or machines are added to the production process, they may start interfering with each other, leading to a decrease in efficiency.
2. Limited Resources: When a firm has limited resources, adding more inputs to the production process may not result in a significant increase in output.
3. Management Issues: If a firm's management is not able to effectively manage the increased inputs and maintain efficiency, it may lead to decreasing returns to scale.
4. Technological Constraints: When a firm's technology is not capable of handling increased inputs or the production process becomes more complex, it may lead to diminishing returns.
Example:
For example, if a factory increases its workforce by 50%, it may not be able to produce 50% more output, due to factors such as overcrowding, limited resources, and management issues. Instead, the increase in output may be only 30-40%, resulting in decreasing returns to scale.
Conclusion:
Decreasing returns to scale is a critical concept for businesses to understand as it helps them to determine the optimal level of production capacity for their operations. Firms should carefully analyze the factors that lead to decreasing returns to scale to ensure that they are operating at their most efficient level.
Factors affecting decreasing returns to scale:
1. Overcrowding: When too many workers or machines are added to the production process, they may start interfering with each other, leading to a decrease in efficiency.
2. Limited Resources: When a firm has limited resources, adding more inputs to the production process may not result in a significant increase in output.
3. Management Issues: If a firm's management is not able to effectively manage the increased inputs and maintain efficiency, it may lead to decreasing returns to scale.
4. Technological Constraints: When a firm's technology is not capable of handling increased inputs or the production process becomes more complex, it may lead to diminishing returns.
Example:
For example, if a factory increases its workforce by 50%, it may not be able to produce 50% more output, due to factors such as overcrowding, limited resources, and management issues. Instead, the increase in output may be only 30-40%, resulting in decreasing returns to scale.
Conclusion:
Decreasing returns to scale is a critical concept for businesses to understand as it helps them to determine the optimal level of production capacity for their operations. Firms should carefully analyze the factors that lead to decreasing returns to scale to ensure that they are operating at their most efficient level.
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Increase in all input leading to less than proportional increase in output is called ______:a)Increasing returns to scaleb)Decreasing returns to scalec)Constant returns to scaled)Both increasing and decreasing returns to scaleCorrect answer is option 'B'. Can you explain this answer?
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