Question

(figure: capital and labor xii) which of the following statements is (are) true? a graph titled graph (a) plots labor (l) along the horizontal axis and capital (k) along the vertical axis. the horizontal axis values range from 0 to 28 with intervals of 4 units and the vertical axis values range from 0 to 20 with intervals of 4 units. two concave up decreasing curves q equals 20 and q equals 50 originate at (4, 12) (10, 19) and end at (17, 1) (25, 7). point (10, 4) is marked on curve q equals 20 and (20, 8) is marked on curve q equals 50. a dashed line from this point extends to the respective coordinate on the horizontal axis. all data are approximate. a graph titled graph (b) plots labor (l) along the horizontal axis and capital (k) along the vertical axis. the horizontal axis values range from 0 to 28 with intervals of 4 units and the vertical axis values range from 0 to 20 with intervals of 4 units. two concave up decreasing curves q equals 35 and q minus 70 originate at (4, 13) (13, 19) and end at (14, 3) (23, 9). point (8, 6) is marked on curve q equals 20 and (17, 12) is marked on curve q equals 50. a dashed line from this point extends to the respective coordinate on the vertical axis. i. panel a illustrates constant returns to scale. ii. panel b illustrates decreasing returns to scale. iii. panel a illustrates increasing returns to scale iv. panel b illustrates constant returns to scale. iii and iv i and iv i and iii ii and iii

Answer 1

Option (A) is the correct answer: Panel a illustrate Increasing Return to Scale and panel b illustrate Constant Return to Scale.

Return to Scale:

It is the Variation or change in productivity that is the outcome from a proportionate increase of all the input.

Increasing Return to Scale:

An increasing return to scale occurs when the output increase by a larger proportion than the increase in inputs during the production process. For Example: if input is increased by 3 times but output increases by 3.75 times, then the firm or economy has experienced an increasing return to scale. This increase is due to many reasons like division external economies of scale.

Constant Return of Scale:

Constant Return of Scale refers to the production situation in which output increases exactly in the same proportion in which factors of production are increased. In simple words, if factors of production are doubled output will also be doubled. In this case, internal and external economies are exactly equal to internal and external diseconomies. This situation arises when after reaching a certain level of production, economies of scale are balanced by diseconomies of scale. For Example:  A car wash in which one car wash takes 30 minutes. If there is one wash space and two workers running two 8 hours shifts total product would be 32.

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