When a proportional increase in all inputs results in an increase in…

The correct answer is Option (4) → Decreasing returns to scale.

In the long run a firm can change all its inputs. The returns to scale describe what happens to output when all inputs are increased in the same proportion, say all doubled. Comparing the rise in output with the rise in inputs gives three cases:

• Constant returns to scale: output rises in the same proportion; doubling all inputs doubles output.

• Increasing returns to scale: output rises in a larger proportion; doubling all inputs more than doubles output.

• Decreasing returns to scale: output rises in a smaller proportion; doubling all inputs less than doubles output.

Here output rises by a smaller proportion than the inputs: when every input doubles, output less than doubles. Output growing more slowly than the inputs is the third case, decreasing returns to scale.

Why the other options are incorrect

• Option (1) Increasing returns to scale. — Incorrect. Under increasing returns output rises by a larger proportion than the inputs; doubling all inputs more than doubles output.

• Option (2) Constant returns to scale. — Incorrect. Under constant returns output rises by the same proportion as the inputs; doubling all inputs doubles output, no more and no less.

• Option (3) Cobb-Douglas returns to scale. — Incorrect. Cobb-Douglas is the name of a form of production function, q = x₁^αx₂^β, and not a kind of returns to scale. Depending on whether α + β is equal to, greater than or less than 1, the same function shows constant, increasing or decreasing returns.

Note: A same/similar question was asked in CUET (UG) in the papers below.

* A similar question.