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Returns to Scale

If the increa...

Question

If the increase in output is less than the increase in inputs, we have returns.

A

negative

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B

constant

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C

increasing

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D

decreasing

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Solution

The correct option is D decreasing
This is the phenomenon of decreasing returns. The increase in output is less than the increase in inputs.

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Increasing returns to scale (IRS) holds when a proportional increase in all inputs results in an increase in output by more than the proportion.

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