Question

When does a production function satisfy constant returns to scale?

Answer 1

Constant returns to scale will hold when a proportional increase in all the factors of production leads to an equal proportional increase in the output. For example, if both labour and capital are increased by 10% and if the output also increases by 10%, then we say that the production function exhibits constant returns to scale.

Algebraically, constant returns to scale exists when

f(nL, nK) = n. f(L, K)

This implies that if both labour and capital are increased by ‘n’ times, then the production also increases by ‘n’ times.