When does a production function satisfy increasing returns to scale?

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Solution

Increasing returns to scale (IRS) holds when a proportional increase in all the factors of production leads to an increase in the output by more than the proportion. For example, if both the labour and the capital are increased by ‘n’ times, and the resultant increase in the output is more than ‘n’ times, then we say that the production function exhibits IRS.

Algebraically, IRS exists when

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

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When does a production function satisfy decreasing returns to scale?

When does a production function satisfy constant returns to scale?

Q. Increasing returns to scale is a property of a production function _____.

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

Constant returns to scale (CRS) is a property of production function that holds when a proportional increase in all inputs results in an increase in output by the same proportion.

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