The production function can have increasing returns to scale or decreasing returns to scale -- but it cannot have initially increasing and eventually decreasing returns to scale.

Question

The production function  can have increasing returns to scale or decreasing returns to scale -- but it cannot have initially increasing and eventually decreasing returns to scale.

Quizplus · Accepted Answer

This statement is true. A production function can have either increasing returns to scale or decreasing returns to scale, but it cannot have initially increasing and eventually decreasing returns to scale. This is because increasing returns to scale means that when all inputs are increased by a certain proportion, output increases by more than that proportion, while decreasing returns to scale means that when all inputs are increased by a certain proportion, output increases by less than that proportion. If a production function starts with increasing returns to scale, it will continue to have increasing returns to scale as all inputs are increased, and if it starts with decreasing returns to scale, it will continue to have decreasing returns to scale as all inputs are increased.

The Production Function Can Have Increasing Returns to Scale