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IAI Actuarial Core Principles · Business Economics · Production, costs, revenue and profit in price and output decisions

A Bengaluru fintech finds that tripling all inputs in the long run lifts output by only 2.5 times. Which statement is correct?

This is decreasing returns to scale: tripling every input raises output less than threefold, so long-run average cost rises if input prices are unchanged. It differs from diminishing marginal returns, which apply when only one input varies.

  1. AIt shows increasing returns to scale and falling long-run average cost
  2. BIt shows constant returns to scale and a flat long-run average cost
  3. CIt shows decreasing returns to scale, consistent with rising long-run average cost, perhaps from coordination difficultiesCorrect
  4. DIt shows diminishing marginal returns, because capital is fixed
  5. It shows that technology has improved

Explanation

Inputs rose 3 times but output only 2.5 times, so output rises less than proportionately: decreasing returns to scale. With unchanged input prices, unit costs rise, and management coordination problems are a common cause. Diminishing marginal returns concern one variable input with others fixed, not all inputs scaling.

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