**Understanding Returns to Scale in International Trade**In the classical theory of international trade, one of the assumptions is constant returns to scale. However, most production activities encounter decreasing returns to scale. This difference can significantly affect how industries operate on a global scale.**Constant Returns to Scale:** This occurs when an increase in input results in a proportional increase in output. For example, doubling the inputs in a factory will double the production output, maintaining efficiency.**Decreasing Returns to Scale:** In contrast, decreasing returns to scale happen when output increases by a lesser proportion than the increase in inputs. For instance, continuing to add inputs to a crowded workspace might lead to inefficiencies and smaller output gains.**Production Function Explanation:** To illustrate these concepts, consider a production function that shows the relationship between inputs and outputs. In a graph, a straight line from the origin would indicate constant returns to scale, as output increases consistently with input. Meanwhile, a curve that flattens indicates decreasing returns to scale, where output grows slower as more inputs are added.Understanding these differences helps economists and policymakers develop strategies that account for real-world production dynamics, balancing trade assumptions with practical production realities.

One of the assumptions of classical theory of international trade is constant returns to scale but most production activities face decreasing returns to scale. Explain the difference between these concepts using a production function.

One of the assumptions of classical theory of international trade is constant returns to scale but most production activities face decreasing returns to scale. Explain the difference between these concepts using a production function.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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