CMA Foundation · Fundamentals of Business Economics and Management · Means of Production
A firm in Pune raises all inputs by 20% and its output rises by 30%. Which statement is correct?
The firm shows increasing returns to scale. All inputs were increased by 20% while output rose by 30%, a larger proportion. When output grows more than proportionately to a uniform rise in all inputs, returns to scale are increasing.
- AThe firm shows decreasing returns to scale because output rose less than 100%
- BThe firm shows diminishing marginal returns because one input was varied
- CThe firm shows constant returns to scale because both inputs and output increased
- DThe firm shows increasing returns to scale because output rose by a greater proportion than inputsCorrect
Explanation
Returns to scale compare the proportionate change in output with the proportionate change in all inputs. Output rose 30%, which exceeds the 20% input rise, so returns are increasing. Option about diminishing marginal returns is wrong because all inputs, not one, were changed.
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