Question

Decreasing returns to scale is a property of a production function ______.

• A. that holds when a proportional increase in all inputs results in an increase in output by more than the proportion
• B. that holds when a proportional increase in all inputs results in an increase in output by the same proportion
• C. that holds when a proportional increase in all inputs results in an increase in output by less than the proportion
• D. none of the above

Answer 1

The correct option is C that holds when a proportional increase in all inputs results in an increase in output by less than the proportion

Decreasing returns to scale: If increases in outputs are proportionately less than an increase in quantity of all inputs, returns to scale are said to be decreasing. The terms in the Cobb-Douglas production function are raised to a coefficeint of values lesser than 1 (but more than 0).