Question

Consider a firm that increases its inputs by 15 percent. For each scenario, state whether the firm experiences economies of scale, diseconomies of scale, or constant returns to scale.
a. Outputs increase 15 percent.
b. Outputs increase by less than 15 percent.
c. Outputs increase by greater than 15 percent.

Answer 1

Answer:

a.  The firm experiences constant returns to scale.

b. The firm experiences diseconomies of scale.

c. The firm experiences economies of scale.

Explanation:

To answer the question, the following are explained first:

1. Economies of scale: This occurs when a percentage increase in input by a firm leads to greater percentage increase in its output.

2. Diseconomies of scale: This occurs when a percentage increase in input by a firm leads to less percentage increase in its output.

3. Constant returns to scale: This occurs when a percentage increase in by a firm input leads to an equal percentage increase in its output.

From the question therefore, we have:

a. Outputs increase 15 percent:  The firm experiences constant returns to scale since a 15 percentage increase in its input leads to an equal percentage increase in its output.

b. Outputs increase by less than 15 percent: The firm experiences diseconomies of scale since a 15 percentage increase in its input leads to a lsess than 15 percentage increase in its output.

c. Outputs increase by greater than 15 percent: The firm experiences economies of scale since a 15 percentage increase in its input leads to an a greater percentage increase in its output.