CMA Foundation · Fundamentals of Business Economics and Management · Means of Production
A textile unit in Surat doubles all its inputs (labour, machines and raw material) and finds that its output rises by exactly 100%. Which returns to scale is the unit experiencing?
The unit experiences constant returns to scale. All inputs were doubled, a 100% rise, and output also rose by exactly 100%. Since output changes in the same proportion as inputs, returns to scale are constant, not increasing or decreasing.
- AIncreasing returns to scale
- BConstant returns to scaleCorrect
- CDecreasing returns to scale
- DDiminishing marginal returns
Explanation
When all inputs are increased in a given proportion and output rises in exactly the same proportion, returns to scale are constant. Here inputs rise 100% and output rises 100%. Increasing returns would need output to rise by more than 100%.
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