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CA Foundation · Business Economics · Theory of Production and Cost

A bakery in Pune doubles all its inputs (flour, ovens, labour) and finds that its output rises by exactly 100%. Which type of returns to scale is the bakery experiencing?

The bakery faces constant returns to scale. When every input is doubled and output also doubles, output has changed in the same proportion as inputs. Diminishing marginal returns is a different idea, because it applies when only one input is varied while the others are held fixed.

  1. AIncreasing returns to scale
  2. BConstant returns to scaleCorrect
  3. CDecreasing returns to scale
  4. DDiminishing marginal returns

Explanation

Returns to scale describe what happens to output when all inputs change in the same proportion. Here inputs double and output also doubles, so output rises in the same proportion as inputs, which is constant returns to scale. Diminishing marginal returns concerns changing only one input while others stay fixed, so it does not apply here.

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