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CMA Foundation · Fundamentals of Business Economics and Management · Utility, Wealth, Production

A bakery in Pune uses ovens, flour and bakers. The owner keeps the number of ovens fixed and hires extra bakers, and output per additional baker begins to fall after the fourth baker. This situation illustrates:

This illustrates the law of variable proportions in the short run. Ovens stay fixed while the number of bakers is increased, so the extra output per additional baker eventually falls. Returns to scale would need all inputs increased proportionately, which is not the case here.

  1. ALaw of variable proportions in the short runCorrect
  2. BLaw of constant returns to scale in the long run
  3. CIncreasing returns to scale due to economies
  4. DLaw of equi-marginal utility

Explanation

One factor (ovens) is fixed while another (bakers) is varied, which is the short-run setting of the law of variable proportions. The fall in marginal product after the fourth baker is diminishing returns to the variable factor. Returns to scale require all inputs to change in the same proportion, which did not happen here.

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