Answer to Question #196435 in Microeconomics for bun

Question

Consider a fi rm that produces pizzas with capital and

labor inputs. Defi ne and contrast diminishing returns

and decreasing returns to scale. Explain why it is possible

to have diminishing returns for one input and

constant returns to scale for both inputs

Answer 1

Diminishing returns is an effect of diminishing marginal product while increasing input in the short run after an optimal capacity has been achieved while holding constant at least one variable of production.

Returns to scale is the estimate of productivity by increasing all inputs of production in the long run.

It is possible to have diminishing returns for one input and constant returns to scale for both inputs because diminishing returns and returns to scale are totally different concepts. Diminishing returns to a single variable is as a result of other factors being constant. For example if a production function has two factors say labor and capital; P=f(K,L), holding capital constant will result to diminishing returns in labor and constant returns to scale.