Answer to Question #130868 in Microeconomics for umer

Question

A 15 per cent increase in all inputs leads to only a 5 per cent increase in the output. Are the returns to scale increasing, constant or diminishing? Illustrate your answer

Answer 1

Supposing an organization increases its input by 15% and acquires a 5% rise in its output then the firm is experiencing a diminishing return to scales. Hirschey and Bentzen (2016) established that a diminishing return to scales occurs when an increase in inputs results in increased output which is less than the proportionate increase in output. Returns to scale can decrease following reduced efficiency in production. Hence, the returns to scales are diminishing when an increase in output is lower than its input increase.

Reference

Hirschey, M., & Bentzen, E. (2016). Managerial economics. Cengage Learning.