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CA Foundation · Business Economics · Theory of Production and Cost

A firm using labour (L) and capital (K) has a production function where output is Q = 2L + 3K. If it moves from (L=10, K=10) to (L=20, K=20), what type of returns to scale does it show?

The firm shows constant returns to scale. Output at 10 units each of labour and capital is 50, and at 20 units each it is 100. Doubling all inputs exactly doubles output, so the proportional increase in output equals that in inputs.

  1. AIncreasing returns to scale
  2. BDecreasing returns to scale
  3. CConstant returns to scaleCorrect
  4. DNegative returns to scale

Explanation

At (10,10), Q = 20 + 30 = 50. At (20,20), Q = 40 + 60 = 100. Inputs doubled and output exactly doubled, so returns to scale are constant. Choosing increasing would need output to more than double.

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