Question

Can a firm have a production function that exhibits increasing returns to scale, constant returns to scale, and decreasing returns to scale as output increases? Discuss.

1) No. The functional form of the production technology dictates the type of returns to scales it exhibits, and there will only be one of the three types of returns to scale exhibited throughout the range of production possibilities.
2) No. The functional form of the production technology dictates the type of returns to scale it exhibits. While a production function can exhibit both increasing returns and constant returns to scale at different levels of output, increasing returns and decreasing returns to scale are mutually exclusive.
3) Yes. At low levels of output, increasing marginal returns lead to increasing returns to scale. Then, at intermediate levels of output, diminishing marginal returns lead to constant returns to scale. And finally, for large scale operations, logistical and bureaucratic problems can lead to decreasing returns to scale.
4) Yes. At low levels of output, specialization leads to increasing returns to scale. Once specialization has been exhausted, proportional increases in all inputs lead to constant returns to scale. And finally, for large scale operations, logistical and bureaucratic problems can lead to decreasing returns to scale.

Answer 1

3) Yes. At low levels of output, increasing marginal returns lead to increasing returns to scale. Then, at intermediate levels of output, diminishing marginal returns lead to constant returns to scale. And finally, for large scale operations, logistical and bureaucratic problems can lead to decreasing returns to scale.

Step-by-step explanation:

A firm can indeed have a production function that exhibits all three types of returns to scale under different ranges of output. Here's a breakdown:

1. Increasing Returns to Scale

- At low levels of output, a firm may experience increasing marginal returns, where additional units of input lead to a more than proportional increase in output. This results in increasing returns to scale.

2. Constant Returns to Scale:

- As the firm expands its production, diminishing marginal returns may set in at intermediate levels. Here, the proportional increase in output matches the proportional increase in inputs, leading to constant returns to scale.

3. Decreasing Returns to Scale:

- At high levels of output, logistical and bureaucratic issues may arise, causing inefficiencies and leading to decreasing returns to scale. Proportional increases in inputs may result in less-than-proportional increases in output.

Therefore, the correct option is 3, as it accurately describes how a firm can transition through increasing, constant, and decreasing returns to scale at different levels of production.