Answer to Question #281664 in Microeconomics for ken

Question

Suppose a hotel exhibits constant returns to scale as it increases its output. If it increases all its inputs by 10%, its:

select

A. total cost will increase by less than 10%

B. average total cost will increase by 10%

C. output will increase by 10%.

D. long run average cost curve will shift to the right by 10%

Answer 1

Solution:

The correct answer is C. output will increase by 10%.

 

This is because in a constant returns to scale, output increases in the same proportion as all inputs. Therefore, given a percentage change in all inputs, output increases by the same percentage.

As such, when the hotel increases all its inputs by 10%, its output will increase proportionally by 10%.