The assumption of constant returns to scale suggests that if N and K both increase by 5%:
A) Y will increase by exactly 5%.
B) Y will increase by less than 5%.
C) Y will increase by more than 5%.
D) The capital- labour ratio (K/N) will decrease.
E) The capital- labour ratio (K/N) will increase.

Question

Quizplus · Accepted Answer

The assumption of constant returns to scale implies that increasing inputs proportionally results in a proportional increase in output. Therefore, if both N and K increase by 5%, Y will also increase by 5%.

The Assumption of Constant Returns to Scale Suggests That If