The table shows a firm’s output when it uses different amounts of labour and capital:
| Labour (units) | Capital (units) | Output (units) |
|---|---|---|
| 2 | 2 | 40 |
| 4 | 4 | 70 |
| 8 | 8 | 120 |
The production function of this firm displays:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Decreasing returns to scale
Labour and capital double each time, but output less than doubles. That is decreasing returns to scale.
\( 40 \times 2 = 80, \text{ but output is } 70 \)
\( 70 \times 2 = 140, \text{ but output is } 120 \)
Option (1) The law of variable proportions — Incorrect. That law needs one input fixed; here both change together.
Option (2) Constant returns to scale — Incorrect. Under CRS, output would be 80 and then 160.
Option (3) Decreasing returns to scale — Correct. Output rises by a smaller proportion than the inputs.
Option (4) Increasing returns to scale — Incorrect. Under IRS, output would be more than 80 and 140.
NCERT (2026-27): “3.6 Returns to Scale … When a proportional increase in all inputs results in an increase in output by the same proportion, the production function is said to display Constant returns to scale (CRS). When a proportional increase in all inputs results in an increase in output by a larger proportion, the production function is said to display Increasing Returns to Scale (IRS) Decreasing Returns to Scale (DRS) holds when a proportional increase in all inputs results in an increase in output by a smaller proportion. For example, suppose in a production process, all inputs get doubled. As a result, if the output gets doubled, the production function exhibits CRS. If output is less than doubled, then DRS holds, and if it is more than doubled, then IRS holds.” |