The correct answer is option 1: Constant returns to scale (CRS)
- Returns to Scale refers to how output changes when all inputs (such as labor and capital) are increased proportionally.
- If a company doubles its plant and labor capacity and expects output to also double, this indicates a proportional increase in output relative to inputs.
- This situation represents Constant Returns to Scale (CRS), where output increases in the same proportion as input increases.
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Why not the other options?
- Increasing Returns to Scale (IRS): This occurs when output increases by more than double when inputs are doubled.
- Decreasing Returns to Scale (DRS): This occurs when output increases by less than double when inputs are doubled.
- Economies of Scale: This refers to cost advantages due to expansion, but it does not necessarily describe the relationship between input and output in this case.
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