Define increasing returns to scale illustrating your definit

Define increasing returns to scale illustrating your definition with isoquants. What are some reasons why firms might experience increasing returns to scale? Use graphs to illustrate and explain the income-offer curve of quasi-linear preference and the Engel Curve for the commodity in the non-linear preference part. Interpret the economic rent and producer\' s surplus, and the relationship between them.

Solution

Q. 13

Increasing returns to Scale:- When inputs are increased in a given proportion and output increases in a greater proportion, the returns to scale are said to be increasing. In other words, proportionate increase in all factors of production results in a more than proportionate increase in output is a case of increasing returns to scale. Thus, if all inputs are doubled than total output is more than doubled.

For example, if the inputs are increased by 40 % and output increased by 50 %, return to scale are increasing. It is the first stage of production.

Q. 15.

Economic Rent and Producer\'s Surplus:-

Economic Rent:- It is the payment for use of land. It is derived from ownership of land and other free gifts of nature. According to modern economists, it is the surplus over the opportunity cost of a factor of production.

Producer\'s Surplus:- It is the difference between the amount that the producer is willing to supply goods for and actual amount received by him/her when he makes the trade.