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Difficulty: EasyScales of Production and Economies of Scale

A solar energy equipment manufacturing firm located in Enugu doubles all of its production inputs, including both capital equipment and labor. Consequently, its total daily output of solar panels increases by 150%150\%. Which of the following long-run production concepts is illustrated by this firm's expansion?

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

Answer

Increasing returns to scale
When a firm increases all factor inputs by a given proportion (here, doubling inputs equals a 100%100\% increase) and output rises by a larger proportion (150%150\%), the firm experiences increasing returns to scale.

Step-by-Step Solution

1
Calculate the percentage change in production inputs
Doubling all inputs represents a 100%100\% increase in scale.
Returns to scale examine how output responds when all inputs are varied proportionally in the long run.
2
Compare the percentage change in output with the percentage change in inputs
Output increased by 150%150\%, which is greater than the 100%100\% increase in inputs.
Evaluating the input-output ratio determines whether scale returns are constant, increasing, or decreasing.
3
Identify the economic concept
A more than proportionate increase in output relative to inputs signifies increasing returns to scale.
This relationship defines long-run economies of scale.

Key Concept

Scales of Production and Economies of Scale
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Topics

Scales of Production and Economies of Scale

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