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CA Foundation · Business Economics · Theory of Production and Cost

A garment unit in Tiruppur uses 4 units of capital and 20 workers to make 1,000 shirts. When it moves to 8 units of capital and 40 workers, output becomes 2,400 shirts. The production function is showing:

The unit shows increasing returns to scale. Both capital and labour were doubled, an increase of 100 percent, but output rose from 1,000 to 2,400 shirts, an increase of 140 percent. Output grew more than proportionately to inputs.

  1. AConstant returns to scale
  2. BDecreasing returns to scale
  3. CIncreasing returns to scaleCorrect
  4. DDiminishing marginal returns to labour only

Explanation

All inputs are doubled (4 to 8 capital, 20 to 40 labour), so inputs rise by 100%. Output rises from 1,000 to 2,400, i.e. 140%, which is more than 100%. This is increasing returns to scale. Diminishing marginal returns concern changing one input with others fixed, so it does not apply here.

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