Returns to scale

Question 1

define increasing returns to scale

Answer 1

where an increase in factor inputs leads to a more than proportionate increase in output

Question 2

define decreasing returns to scale

Answer 2

where an increase in factor inputs leads to a less than proportionate increase in output

Question 3

define constant returns to scale

Answer 3

where an increase in factor inputs leads to proportionate increase in output

Question 4

why would a firm tolerate producing beyond capacity in the short run

Answer 4

• process of building new premises
• finding finances for premises
• costs are same at both points
• firms may suffer from imperfect information
• one off