Question

If decreasing returns to scale is present and all inputs are increased by 10% then _________.

• A. output will increase by more than 10%
• B. output will increase by less than 10%
• C. output will increase exactly by 10%
• D. output will decrease by 10%

Answer 1

Answer: (B)

output will increase by less than 10%

Decreasing returns to scale: If increases in output is proportionately less than an increase in quantity of all inputs, returns to scale are said to be decreasing. Thus a 10% increase in inputs will yield a less than 10% increase in output. The terms in the Cobb-Douglas function are raised to the coefficeints less than 1.