hw6 - Economics Microeconomics Year 4 Microeconomics...

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Unformatted text preview: Economics, Microeconomics - Year 4 Microeconomics problems Economists classify production funtions as possessing constanct, decreasing, or increasing returns to scale. Yet, from a cause and effect point of view, it is not readily apparent why decreasing returns to scale should ever exist. That is, if we duplicate an activity we ought to get duplicate results. Hence, if we truly duplicate all of the inputs, we ought to get double the output. Can you reconcile the apparent contradiction between this logic and the expectation of the economist that beyond certain output ranges firms will confront decreasing returns to scale? • Created: • Nov 01, 2005 11:51 am • Solution By OTA: • 101733, Jiong Tu, PhD (IP) Solution go to problem Decreasing returns to scale are technological conditions under which a given percentage increase in all the firm's inputs results in the firm's output increasing by a smaller percentage. In the Figure, moving from x2 to x3, the production function is concave, so that by doubling inputs we...
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