Suppose a firm is producing in the long run. When it produces 4,000 units of output, its total cost is $8,000. When it produces 4,200 units of output, its total cost is $8,200, and when it produces 4,400 units of output, its total cost is $8,800. This firm is experiencing (constant, decreasing, increasing, increasing then decreasing, decreasing then increasing) returns to scale?

increasing returns to scale: output increases in a greater proportion than inputs
constant returns to scale: output increases in the same proportion as inputs
decreasing returns to scale: output increases in a lower proportion than inputs

Since first the average total cost decreased, total output increased in a greater proportion than inputs ⇒ increasing returns of scale. But then the situation reversed and total output increased in a lower proportion than inputs ⇒ decreasing returns of scale.

Tundexi Tundexi · Answer 2 · 2021-10-26T15:35:20+02:00

The firm is experiencing Increasing then decreasing returns to scale.

In economics, the returns to scale measure change in productivity or extent of input that is needed to produce a unit of output.

increasing returns to scale is when output increases in a greater proportion than inputs.
Constant returns to scale is when output increases in the same proportion as inputs.
Decreasing returns to scale is when output increases in a lower proportion than inputs.

Production level Total cost Average total cost

4,000 $8,000 $2.00

4,200 $8,200 $1.95

4,400 $8,800 $2.00

Therefore, in conclusion, from our observation from the inputs above, we will see that the scales of return is increasing and then decreasing.

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