Consider a production function $q = f (x_1, x_2)$ where the firm produces q amount of output using $x_1$ amount of factor 1 and $x_2$ amount of factor 2. Now suppose the firm decides to increase the employment level of both the factors $t (t > 1)$ times.
Identify the correct statement from the following.
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → $f(tx_1, tx_2) = t.f (x_1, x_2)$ implies constant returns to scale.
$f(tx_1, tx_2) = t.f (x_1, x_2)$ = Constant Returns to Scale
$f(tx_1, tx_2) < t.f (x_1, x_2)$ = Decreasing Returns to Scale
$f(tx_1, tx_2) > t.f (x_1, x_2)$ = Increasing Returns to Scale