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CA Foundation · Business Economics · Theory of Production and Cost

A packaging unit in Rajkot uses 10 units of labour and 20 units of capital to produce 500 boxes. When it uses 30 units of labour and 60 units of capital, it produces 1,200 boxes. Which statement is correct?

The unit shows decreasing returns to scale. Both labour and capital triple, so proportional output would be 1,500 boxes, but actual output is only 1,200, a rise of 2.4 times. Output grows less than proportionately to inputs when all inputs are scaled up together.

  1. AConstant returns to scale, because inputs and output both rise
  2. BIncreasing returns to scale, because output rises more than three times
  3. CDecreasing returns to scale, because output rises less than three timesCorrect
  4. DDiminishing marginal returns, because only one input was changed

Explanation

Inputs have tripled (10 to 30 and 20 to 60). Tripling 500 would give 1,500 boxes, but actual output is 1,200, which is only 2.4 times. Output rises less than proportionately, so returns to scale are decreasing. Option D is wrong because both inputs changed.

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