Skip to content

CA Foundation · Business Economics · Theory of Production and Cost

In the short run, a firm experiences increasing returns to labour initially. This occurs because:

Increasing returns to labour in the short run happen because additional workers can better utilize the fixed capital through improved specialization and division of labour, enhancing overall productivity and efficiency.

  1. AThe price of raw materials decreases as production increases
  2. BFixed capital is fully utilized by additional workers, improving division of labour and specializationCorrect
  3. CThe average product of labour always rises in the short run
  4. DWorkers become more tired and need more supervision

Explanation

Increasing returns in the short run occur due to better utilization of fixed factors—with more workers, tasks can be specialized and division of labour improves efficiency. Option 0 is irrelevant to the production function. Option 2 is false—average product eventually falls. Option 3 would cause diminishing, not increasing returns.

Did you get it right without looking?

One question tells you little. A timed set on Theory of Production and Cost shows your real accuracy, how long you take and where you lose marks.

Practise Theory of Production and CostFree diagnostic mock

More Theory of Production and Cost questions