Give an example of industries with the following i decreasin

Give an example of industries with the following:

i. decreasing returns to scale
ii. constant returns to scale
iii. increasing returns to scale

Solution

Return to scale is the change in output when all variable inputs are changed in the same proportion. suppose Labor (L) and Capital (k) are two variable inputs affecting total production (Q). Now both L and K are increased by 10%.

1. If output Q has increased less than 10%, then it is a situation of decreasing return to scale

2. If output Q has increased by exactly 10% then it is a constant return to scale.

3. Finally if Q is increasing at a rate higher than 10%, then it is increasing return to scale.

Consider carpet Industry of USA. You will observe constant return to scale for small firm. When its size has increased, initially you will observe an increasing return to scale. But with the gradual expansion of its size, diminishing return to scale is observed.