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Difficulty: MediumScales of Production and Economies of Scale

A palm oil processing enterprise operating in Ondo State doubles all of its production inputs (labor, land, and capital), resulting in a 130%130\% increase in total output and a fall in its long-run average cost per unit. Which economic phenomenon is the firm experiencing?

  1. A
    The law of diminishing marginal returns
  2. Increasing returns to scaleAnswer
  3. C
    Decreasing returns to scale
  4. D
    External diseconomies of scale

Answer

The firm is experiencing increasing returns to scale because total output increases by a greater percentage (130%130\%) than the increase in factor inputs (100%100\%), lowering long-run average costs.
Increasing returns to scale occur in the long run when a proportional expansion of all production inputs results in a more than proportional increase in total output. Here, doubling inputs (100%100\% increase) produces a 130%130\% increase in output, reducing long-run unit costs.

Step-by-Step Solution

1
Calculate the percentage change in factor inputs
Doubling inputs represents a 100%100\% increase in all production factors in the long run.
Returns to scale examine output changes when all inputs change by a given proportion.
2
Compare the percentage change in output with the percentage change in inputs
Output growth (130%130\%) exceeds input growth (100%100\%).
When %ΔOutput>%ΔInputs\% \Delta \text{Output} > \% \Delta \text{Inputs}, the firm achieves economies of scale and experiences increasing returns to scale.

Key Concept

Increasing Returns to Scale
Estimated Time:1m 15s
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Topics

Scales of Production and Economies of Scale

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