10 - MRTS, Isoquants, Returns to Scale

Question 1

What is returns to scale?

1.
2.
3.
4.

Answer 1

• rate at which output increases as inputs are increased proportionally
• in order to increase output in long run
• three cases: increasing (output more than doubles when input doubled) - mostly manufacturing industries, decreasing (output less than doubles)- mostly service oriented industries, bc more labor intensive and constant
• do not have to be uniform across all possible levels of outpur, might vary

Question 2

What might be reasons for increasing returns to scale?

1.
2.
3.

Answer 2

• larger scale of operation might allw managers and workers to sepcialize in their tasks and make use of large scale equipment
• e.g. automobile industry
• if there are increasing returns, its economically advantegour to have one firm producing at relatively high cost compared to many small firms at relatively large cost

Question 3

What happens at decreasing returns to scale?

Answer 3

• maybe difficulties in organizing and running a large scale company lead to decreased productivity in both labor and capital
• communication might have become difficult to monitor