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

A firm doubles all its inputs (labour, capital and land) and finds that output rises from 500 units to 900 units. This situation illustrates:

This shows decreasing returns to scale. All inputs were doubled, yet output rose only from 500 to 900 units, an 80% increase, which is less than proportionate. The law of variable proportions does not apply because every input changed, not just one.

  1. AIncreasing returns to scale
  2. BConstant returns to scale
  3. CDecreasing returns to scaleCorrect
  4. DLaw of variable proportions with increasing returns

Explanation

Inputs doubled (100% increase) but output rose only 80% (500 to 900), less than proportionately. This is decreasing returns to scale. Variable proportions applies when only one input varies, not when all inputs change together.

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