In the Cobb-Douglas function Q = K L^a C^b, decreasing returns to scale result when:
Aa + b > 1
Ba + b = 1
Ca + b < 1
Da + b = 0
Answer & Solution
Correct answer: C. a + b < 1
1. In Q = K L^a C^b, the sum of exponents a + b governs returns to scale.
2. If $a + b > 1$ returns are increasing, if $a + b = 1$ they are constant, and if $a + b < 1$ they are decreasing.
3. Decreasing returns therefore require $a + b < 1$.
4. $a + b > 1$ gives increasing and $a + b = 1$ gives constant returns, while $a + b = 0$ is not a meaningful case here.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 3 Unit I "Theory of Production", p.22_
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