Given below are two statements:
Assertion (A): A firm doubles all its inputs and its output rises from 100 to 180 units, so the firm faces decreasing returns to scale.
Reason (R): As long as decreasing returns to scale operate, the long run average cost rises as the firm increases output.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both (A) and (R) are true but (R) is not the correct explanation of (A).
Assertion (A): A firm doubles all its inputs and its output rises from 100 to 180 units, so the firm faces decreasing returns to scale. — True. Inputs double, but output rises from 100 to 180, which is less than double (200).
Reason (R): As long as decreasing returns to scale operate, the long run average cost rises as the firm increases output. — True. Under DRS, inputs and cost rise by more than output, so average cost rises.
Why R does not explain A?
R tells us what DRS does to long run average cost. A is about output and inputs; nothing in it depends on cost. A holds because output rose by a smaller proportion than the inputs, and that is what decreasing returns to scale means.
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.” “Shapes of the Long Run Cost Curves … DRS implies that if we want to increase the output by a certain proportion, inputs need to be increased by more than that proportion. As a result, cost also increases by more than that proportion. So, as long as DRS operates, the average cost must be rising as the firm increases output.” |