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Question
When does a production function satisfy increasing returns to scale?
Short Note
Solution
Increasing returns to scale (IRS) holds when a proportional increase in all the factors of production leads to an increase in the output by more than the proportion. For example, if both the labour and the capital are increased by ‘n’ times, and the resultant increase in the output is more than ‘n’ times, then we say that the production function exhibits IRS.
Algebraically, IRS exists when
f(nL, nK) > n. f(L, K)
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Returns to Scale
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