Returns to scale is a concept that applies to
- A.the short run, when one factor is fixed
- B.the long run, when all factors can be changed
- C.the market period, when output is fixed
- D.only to agriculture
Correct answer
Explanation
The correct answer is B, the long run, when all factors can be changed. Returns to scale asks what happens to output when every input is increased in the same proportion, which is possible only in the long run, when the firm can build a bigger plant as well as hire more labour. If output rises more than proportionately the firm enjoys increasing returns to scale, usually from economies of scale such as specialised machinery; proportionate change is constant returns, and a less than proportionate rise is decreasing returns, caused by difficulties of management. Option A is wrong because the short run, with a fixed factor, is governed by the law of variable proportions. Option C is wrong because in the market period output is already produced and cannot be varied at all. Option D is wrong because the concept applies to every kind of production.
Read the full article: Production, Cost and Revenue: Concepts and Formulas
Practice Questions
View allWhich of the following costs remains the same at every level of output in the short run?
- A.Total variable cost
- B.Total fixed cost
- C.Marginal cost
- D.Average cost
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Fixed cost is the payment for factors that cannot be varied in the short run, such as the rent of the factory building, insurance and the salary of permanent staff, and it has to be met even when output is zero, which is why it is also called supplementary or…
Read the full explanation →As the level of output increases, the average fixed cost of a firm
- A.remains constant
- B.rises continuously
- C.falls continuously but never becomes zero
- D.first falls and then rises
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Average fixed cost is total fixed cost divided by output; the numerator is unchanged, so a larger output spreads the same fixed cost over more units.
Read the full explanation →The marginal cost curve cuts the average cost curve at
- A.the minimum point of the average cost curve
- B.the maximum point of the average cost curve
- C.the point where average cost equals average fixed cost
- D.no point at all
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The reason is arithmetic rather than economic: so long as marginal cost is below average cost, each extra unit pulls the average down, and once marginal cost rises above average cost the average must rise, so the two can only be equal where the average is at its lowest.
Read the full explanation →The law of variable proportions operates in which situation?
- A.When all factors of production are increased in the same proportion
- B.When one factor is varied and the others are held fixed
- C.Only in the long run
- D.Only when the firm is in equilibrium
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This is the defining condition of the short run, where plant and machinery cannot be changed, so only the proportion between the variable factor and the fixed factor alters.
Read the full explanation →Under perfect competition, the average revenue of a firm is equal to
- A.total cost
- B.marginal cost only
- C.price and marginal revenue
- D.half the price
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A firm in perfect competition is a price taker because its output is a negligible part of the market, so it can sell any quantity at the ruling price.
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