In the short run, a firm can vary only labour. It doubles its labour, and its output rises from 40 to 70 units. Its manager says that the firm faces decreasing returns to scale. Is the manager right?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → No; returns to scale need all inputs to rise in the same proportion, so this shows the effect of changing factor proportions.
Returns to scale need all inputs to rise in the same proportion, and that is possible only in the long run. Here only labour is doubled, so the factor proportions change.
Option (1) No; output has risen by 30 units, so the firm faces increasing returns to scale. — Incorrect. Returns to scale cannot be judged when only one input changes.
Option (2) Yes; in the short run, decreasing returns to scale appear whenever marginal product falls. — Incorrect. A falling marginal product in the short run is the law of variable proportions, not returns to scale.
Option (3) Yes; output has risen by less than double when the input was doubled, so the firm faces decreasing returns to scale. — Incorrect. Output less than doubled would mean DRS only if both inputs were doubled.
Option (4) No; returns to scale need all inputs to rise in the same proportion, so this shows the effect of changing factor proportions. — Correct. Capital stays fixed, so this is a change in factor proportions.
NCERT (2026-27): “3.6 Returns 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. … Remember that this can happen only in the long run. One special case in the long run occurs when both factors are increased by the same proportion, or factors are scaled up.” |