Chapter 11, Problem 15P

To determine

To Discuss:

• Law of Returns to Scale

Concept Introduction:

The Law of Returns to Scale is based upon the assumption that in the long run all factors of production are variable and the scale of production can be changed by changing the quantity of all factors of production.

The term returns to scale means the change in output as all factors change in the same proportion or we can define it as the behaviour of total output when all inputs are varied.

The returns to scale are of three types -

• Increasing Returns to Scale - It means when the output increases at a higher rate than the increase in factors of production.

• Constant Returns to Scale - It means the proportionate change in output is equal to the proportionate change in input.

• Diminishing or Decreasing Returns to Scale - It means where the output increases in smaller proportion than the increasing factor of production.