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Difficulty: MediumLong-Run Costs and Production

A manufacturing firm increases all of its production inputs by 50%50\%. Consequently, its total output expands by 75%75\%. Which of the following best describes the firm's long-run production condition?

  1. The firm is experiencing increasing returns to scale.Answer
  2. B
    The firm is experiencing diminishing returns to a variable factor.
  3. C
    The firm is operating under constant returns to scale.
  4. D
    The firm is experiencing decreasing returns to scale.

Answer

The firm is experiencing increasing returns to scale.
In long-run production, when all inputs are increased by a given percentage (50%50\%) and total output increases by a greater percentage (75%75\%), the firm experiences increasing returns to scale.

Step-by-Step Solution

1
Identify the time horizon and input changes
All production inputs are variable and scaled up simultaneously by 50%50\%.
Evaluating long-run production involves changing the scale of all factors of production.
2
Compare output growth to input growth
Percentage increase in output (75%75\%) is greater than the percentage increase in inputs (50%50\%).
Returns to scale compare the proportionate change in output with an equiproportionate change in all inputs.
3
Determine the economic classification
The firm exhibits increasing returns to scale.
An output expansion that exceeds the proportionate input increase defines increasing returns to scale.

Key Concept

Returns to scale in long-run production
Estimated Time:1m 0s
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Topics

Long-Run Costs and Production

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