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CMA Foundation · Fundamentals of Business Economics and Management · Means of Production

A Pune engineering firm expands its plant. When all inputs are increased by 50%, output rises by 20%. Output was 5,000 units originally. Assuming the same proportional relationship holds, which conclusion is correct?

New output is 6,000 units and the firm faces decreasing returns to scale. A 20% rise on 5,000 units gives 6,000. Because output increases by only 20% while all inputs increase by 50%, output grows less than proportionately.

  1. ANew output is 7,500 units and the firm has constant returns to scale
  2. BNew output is 6,000 units and the firm has decreasing returns to scaleCorrect
  3. CNew output is 6,000 units and the firm has increasing returns to scale
  4. DNew output is 7,500 units and the firm has decreasing returns to scale

Explanation

20% of 5,000 is 1,000, so new output is 6,000 units. Inputs rose by 50% but output rose by only 20%, which is a less than proportionate increase, so returns to scale are decreasing. The 7,500 figure comes from wrongly applying the 50% input increase to output.

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