Question

Does this production function exhibit​ increasing, decreasing, or constant returns to​ scale? A. Decreasing returns to scale because the inputs exhibit diminishing marginal returns. B. Increasing returns to scale because the inputs exhibit diminishing marginal returns. C. Constant returns to scale because a proportionate increase in all inputs results in the same proportionate increase in output.

Answer 1

Answer: Option A : Decreasing returns to scale because the inputs exhibit diminishing marginal returns.

Explanation:

Return to scale measures the degree of effect certain changes in the input factors(parameters) has on the output in the long run.

Also in simple words, Marginal returns in Economics describes a situation where the increasing the input or intake of a commodity leads to decrease in satisfaction (output).

Hence, for a system that it's input exhibits marginal returns, increasing the input(e.g Capital, Land) leads to decrease in output (satisfaction; Marginal returns parlance) thereby DECREASING the RETURN TO SCALE.