CA Foundation · Business Economics · Theory of Production and Cost
A firm doubles all of its inputs and finds that its output rises by less than double. Which of the following does this situation illustrate?
The situation shows decreasing returns to scale. All inputs are scaled up in the same proportion, but output rises by a smaller proportion. Diminishing marginal returns is a short-run idea in which only one input varies while others stay fixed, so it does not apply here.
- AIncreasing returns to scale
- BDecreasing returns to scaleCorrect
- CConstant returns to scale
- DLaw of diminishing marginal returns
Explanation
When every input is increased in the same proportion and output rises by a smaller proportion, the firm faces decreasing returns to scale. The law of diminishing marginal returns is different because it holds at least one input fixed and varies only one input, so option D is wrong.
Did you get it right without looking?
One question tells you little. A timed set on Theory of Production and Cost shows your real accuracy, how long you take and where you lose marks.
More Theory of Production and Cost questions
- A bakery experiences economies of scale up to 5,000 units of bread per week, after which it faces diseconomies of scale. Currently producing…
- Which of the following is an example of an internal economy of scale for a manufacturing firm?
- When a firm expands from short run to long run operations, it can adjust all factors of production. How does the long-run average cost curve…
- A textile factory has the following cost structure: Fixed costs = ₹50,000 per month; Variable cost per unit = ₹200. If the factory produces …
- In the short run, a firm experiences increasing returns to labour initially. This occurs because:
- In the short run, a firm's average variable cost (AVC) is ₹40 at 100 units and its marginal cost (MC) at that output is ₹40. Assuming AVC is…