Given the production function $f(tx_1, tx_2) > t.f (x_1, x_2)$, what it exhibit:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Increasing returns to scale.
The production function exhibits increasing returns to scale if we have, $f(tx_1, tx_2) > t.f (x_1, x_2)$.
The production function exhibits constant returns to scale if we have $f(tx_1, tx_2) = t.f (x_1, x_2)$
The production function exhibits decreasing returns to scale if we have $f(tx_1, tx_2) < t.f (x_1, x_2)$