A Level Economics AQA Practice Exam

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Prepare for the A Level Economics AQA Exam with our interactive quiz. Test your knowledge with multiple choice questions and detailed explanations. Equip yourself with the tools needed for success!

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What characterizes increasing returns to scale?

Output decreases with increased inputs
Output increases in proportion to input increase
Output increases more than proportionately to inputs
Output remains constant despite changes in inputs

The correct answer is: Output increases more than proportionately to inputs

Increasing returns to scale occurs when a firm's output increases more than proportionately in response to a proportional increase in all inputs. This means that if the firm doubles its inputs, it will produce more than double its output. This phenomenon often arises from factors such as enhanced efficiencies, better utilization of resources, or advantages gained through larger operational scales, leading to lower average costs per unit produced. In an environment practicing increasing returns to scale, a firm can take advantage of efficiencies of scale that may include specialized labor, improved technology, or better distribution networks, making it more productive as it grows. The other options represent different scenarios: one interprets a decrease in output with increased inputs, while another describes a proportional increase in output with input increase. The remaining option suggests that output remains unchanged despite input variations. Each of these scenarios reflects either constant returns to scale or decreasing returns to scale, which contrast fundamentally with the concept of increasing returns to scale.