Question

Pie Claudius is a firm that produces and sells bean pies. Recently it increased its inputs by 60% and output increased by 60%. What did this firm experience?

a) Economies of scale
b) Diseconomies of scale
c) Constant returns to scale
d) Diminishing returns to scale

Answer 1

Pie Claudius, a firm that produces bean pies, increased its inputs and output by the same percentage (60%), leading to constant returns to scale as the average cost remained unchanged.

Step-by-step explanation:

The firm Pie Claudius, which produces and sells bean pies, increased its inputs and output by 60%. This firm experienced constant returns to scale, as an increase in inputs led to a proportional increase in output, meaning the average cost of production remained unchanged. Therefore, the correct answer to the question is c) Constant returns to scale.

It is important to note that with economies of scale, a firm would experience a decrease in the average cost of production as output increases. Conversely, with diseconomies of scale, the average costs would increase as the firm's production goes up. Lastly, diminishing returns to scale are not applicable here as the output has increased proportionally with the inputs, not at a decreasing rate.