The following table shows the marginal products of capital (K) and labour (L) for various methods for Firm ABC to produce 1000 toys per day. TABLE 8-2
-Refer to Figure 8-2. Increasing returns to scale occur over the output range
A) Q₂ to Q₃ only.
B) beyond Q₃ only.
C) 0 to Q₁ only.
D) Q₁ to Q₂ only.
E) 0 to Q₃ only.

Question

The following table shows the marginal products of capital (K) and labour (L) for various methods for Firm ABC to produce 1000 toys per day.  TABLE 8-2
-Refer to Figure 8-2. Increasing returns to scale occur over the output range
A) Q₂ to Q₃ only. 
B) beyond Q₃ only. 
C) 0 to Q₁ only. 
D) Q₁ to Q₂ only. 
E) 0 to Q₃ only.

Quizplus · Accepted Answer

Increasing returns to scale occur when the marginal product of labor and capital increase with an increase in output. Looking at the table, we can see that as output increases from 0 to 1000, both MPL and MPK increase. Hence, there are increasing returns to scale over the output range of 0 to Q3 only. Therefore, the best choice is E.

The Following Table Shows the Marginal Products of Capital (K)