ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -If your firm’s production function has constant returns to scale, then if you double all your inputs, your firm’s output will: A. double and productivity will rise. Constant returns to scale refer to the fact that an increase in the level of inputs will cause a proportional increase in the level of outputs.

Detailed explanation-2: -When the inputs are further doubled that is to 4 units of capital and 12 units of labour, the output has gone up to 240 units, (from 120 units to 240 units). Thus, when inputs arc increased by 100 per cent, the output has increased by 100 per cent. That is, output also has doubled.

Detailed explanation-3: -then the technology described by the production function f exhibits constant returns to scale e g doubling all input returns-to-scale, e.g. doubling all input levels doubles the output level (t=2).

Detailed explanation-4: -What is constant returns of scale? A constant return of scale is an economic condition where a company’s inputs, like capital and labor, increase at the same rate as their outputs, or value of their goods. Returns to scale are long-run measurements.