CMA Foundation · Fundamentals of Business Economics and Management · Theory of Production
A textile mill in Surat doubles all its inputs (looms, labour and yarn) and finds that output rises by more than double. Which concept does this situation illustrate?
This is increasing returns to scale. All inputs are scaled up in the same proportion, and output rises by a greater proportion. It differs from diminishing returns to a variable factor, which concerns changing only one input while the others stay fixed.
- AIncreasing returns to scaleCorrect
- BDiminishing returns to a variable factor
- CConstant returns to scale
- DDecreasing returns to scale
Explanation
When all inputs are increased in the same proportion and output rises by a larger proportion, the firm enjoys increasing returns to scale. Diminishing returns to a variable factor applies when only one input is varied while others are fixed, which is not the case here.
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