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If a firm doubles all of its inputs and as a result its output exactly doubles, the firm is experiencing:
Aincreasing returns to scale
Bdiminishing marginal returns
Cdecreasing returns to scale
Dconstant returns to scale
Answer & Solution
Correct answer: D. constant returns to scale
1. Returns to scale compare the proportional change in all inputs with the proportional change in output.
2. When all inputs and output change in the same proportion, returns to scale are constant.
3. Doubling inputs and getting exactly double output is the same proportion, so it is constant returns to scale.
4. Increasing/decreasing returns need a more/less than proportionate rise in output, and diminishing marginal returns is a short-run, single-variable concept.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 3 Unit I "Theory of Production", p.21_
Related questions
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