This concept is related to the fixed proportions production function in which all the factors are used in defined fixed proportions. Identify the concept.

Returns to Scale

The correct answer is option 2: Returns to Scale

This concept  of Returns to Scale is related to the fixed proportions production function in which all the factors are used in defined fixed proportions.To increase the level of production, one has to increase the quantity of all inputs by same percentage. Thus, in the long run , all factors become variable. The laws under returns to scale are: 

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.