Question

Suppose that capital and labor must be kept in fixed proportion to produce a particular good. For example, preparing a tax return requires one accountant and one computer. This implies that there are_____returns to scale.

O increasing
O decreasing
O constant
О по

Answer 1

The scenario described where capital and labor must be kept in a fixed proportion to produce a good is an example of constant returns to scale. Doubling both capital and labor results in doubling the output without changing the input ratio.

Step-by-step explanation:

If capital and labor must be kept in a fixed proportion to produce a particular good, such as the scenario where preparing a tax return requires one accountant and one computer, this production scenario implies that there are constant returns to scale. In such a case, doubling the input of both labor and capital results in doubling the output, implying that scale of production can be increased without affecting the ratio of input quantities.

For example, a secretarial firm that uses typists and personal computers for typing services may find that during a rush period, the fixed number of computers limits the ability to increase output proportionately to the number of typists. This situation is reflective of a short-term period where capital is fixed.

However, in the long run, all factors, including capital, can be varied, thus allowing firms to adjust labor and capital to maintain constant returns to scale.