Read the passage carefully and answer the questions based on the passage:

Law of Variable Proportion and Return to Scale.

The law of variable proportions arises because factor proportions change as long as one factor is held constant and the other is increased. What if both factors can change? Remember that this can happen only in the long run. When a proportional increase in all inputs results in an increase in output by the same proportion, the production function is said to display Constant returns to scale (CRS).

When a proportional increase in all inputs results in an increase in output by a larger proportion, the production function is said to display Increasing Returns to Scale (IRS). Decreasing Returns to Scale (DRS) holds when a proportional increase in all inputs results in an increase in output by a smaller proportion.

When output increases with the larger proportion compare to increase in inputs, this return is called?

Increasing return to scale.

The correct answer is Option (2) → Increasing return to scale.

• When all inputs are increased proportionally, and output increases by a larger proportion, it is known as Increasing Returns to Scale (IRS).

• This is different from the Law of Variable Proportions, which applies in the short run where only one input is varied.

• The passage states: "When a proportional increase in all inputs results in an increase in output by a larger proportion, the production function is said to display Increasing Returns to Scale (IRS)."