Return to scale
Fixed proportion of the variables
Return to the variable factors
Return to the fixed factors
Answer is Right!
Answer is Wrong!
The correct answer is: A. Return to scale.
In the long run, all factors of production are variable, so the cost and output relationship depends on the returns to scale. Returns to scale refers to the relationship between the amount of inputs used and the amount of output produced. There are three types of returns to scale: constant returns to scale, increasing returns to scale, and decreasing returns to scale.
- Constant returns to scale occur when the amount of output produced increases in proportion to the amount of inputs used. For example, if a company doubles the amount of labor and capital it uses, it will also double the amount of output it produces.
- Increasing returns to scale occur when the amount of output produced increases more than in proportion to the amount of inputs used. For example, if a company doubles the amount of labor and capital it uses, it will more than double the amount of output it produces.
- Decreasing returns to scale occur when the amount of output produced increases less than in proportion to the amount of inputs used. For example, if a company doubles the amount of labor and capital it uses, it will less than double the amount of output it produces.
The returns to scale a company experiences will depend on the technology it uses and the way it organizes its production. Companies that are able to achieve increasing returns to scale can experience significant cost savings as they grow.