Question

When all inputs are increased in the same proportion and the output increases in exactly the same proportion, this is called:

• A. Diminishing returns
• B. Constant returns to scale
• C. Increasing returns to scale
• D. Decreasing returns to scale

Hint:

Exam Tip:
CRS: Output increases by the same proportion as inputs.
IRS: Output increases by a greater proportion than inputs (economies of scale).
DRS: Output increases by a smaller proportion than inputs (diseconomies of scale).

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
This question tests the understanding of returns to scale in the long run, when all inputs are variable.

Step 2: Defining Returns to Scale:
Returns to scale refers to how output changes when all inputs are increased in the same proportion.
There are three possible outcomes:
• Constant Returns to Scale (CRS): When all inputs are increased by a given proportion, output increases by exactly the same proportion.
_ _ _ _ Example: If inputs (Land, Labor, Capital) are doubled, output exactly doubles.
• Increasing Returns to Scale (IRS): When all inputs are increased by a given proportion, output increases by a greater proportion.
_ _ _ _ Example: If inputs are doubled, output more than doubles (e.g., 2.2 times).
• Decreasing Returns to Scale (DRS): When all inputs are increased by a given proportion, output increases by a smaller proportion.
_ _ _ _ Example: If inputs are doubled, output less than doubles (e.g., 1.8 times).

Step 3: Analyzing the Statement:
The statement says: "When all inputs are increased in the same proportion and the output increases in exactly the same proportion."
This is the exact definition of Constant Returns to Scale.

Step 4: Final Answer:
This is called Constant returns to scale. Therefore, option (B) is correct.