CMA Foundation · Fundamentals of Business Economics and Management · Theory of Production
A Jaipur firm raises all inputs by 20% and its output rises by 30%. Which statement is correct?
This shows increasing returns to scale, because output rose 30% while all inputs rose only 20%. Output per unit of input grows, so long-run average cost tends to fall, assuming input prices stay unchanged.
- AConstant returns to scale; average cost unchanged
- BDecreasing returns to scale; average cost rises
- CIncreasing returns to scale; long-run average cost tends to fallCorrect
- DNegative returns; total output falls
Explanation
Output rose by 30%, more than the 20% rise in inputs, so returns to scale are increasing. Each unit of output needs fewer inputs, so with unchanged input prices the long-run average cost falls. Constant returns would need a 20% rise in output.
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