Question

what is increasing returns to scale and decreasing returns to scale?

Answer 1

Answer:

The term "returns to scale" refers to how well a business or company is producing its products. It tries to pinpoint increased production in relation to factors that contribute to production over a period of time.

Multipliers

For illustrative purposes, we'll call the multiplier m. Suppose our inputs are capital and labor, and we double each of these (m = 2). We want to know if our output will more than double, less than double, or exactly double. This leads to the following definitions:

• Increasing Returns to Scale: When our inputs are increased by m, our output increases by more than m.
• Constant Returns to Scale: When our inputs are increased by m, our output increases by exactly m.
• Decreasing Returns to Scale: When our inputs are increased by m, our output increases by less than m.

The multiplier must always be positive and greater than one because our goal is to look at what happens when we increase production. An m of 1.1 indicates that we've increased our inputs by 0.10 or 10 percent. An m of 3 indicates that we've tripled the inputs.

Hope it helps..