A Level Economics AQA Practice Exam

What does constant returns to scale imply?

1. Output increases with a reduction in inputs

2. Output increases directly in proportion to increased inputs

3. Output decreases with an increase in inputs

4. Output does not change regardless of input adjustments

The correct answer is: Output increases directly in proportion to increased inputs

Constant returns to scale refers to a situation in production where an increase in all inputs results in a proportional increase in output. This means that if a firm doubles its inputs, such as labor and capital, its output will also double. The relationship indicates that the efficiency of production remains unchanged as scales of production expand. In this context, the correct option highlights the direct proportionality between input increases and output increases, reflecting the principle of constant returns to scale. This concept is crucial for understanding production processes and helps firms gauge how changes in resource allocation can affect their overall output without altering efficiency. The other statements do not accurately reflect the definition of constant returns to scale. For instance, an increase in output with a reduction in inputs or an output decrease with an increase in inputs would suggest either increasing returns to scale or diminishing returns to scale, which do not apply in this scenario. Additionally, suggesting that output does not change regardless of input adjustments would imply a complete lack of responsiveness in production, contradicting the very principle that input changes lead to output changes in a constant ratio.