A Level Economics AQA Practice Exam

What does decreasing returns to scale indicate?

1. Output increases proportionately with all inputs

2. Output increases less than in proportion to an increase in all inputs

3. Output decreases with an increase in inputs

4. Output remains constant regardless of input changes

The correct answer is: Output increases less than in proportion to an increase in all inputs

Decreasing returns to scale occurs when an increase in all inputs leads to a less than proportional increase in output. This means that if a producer doubles their inputs (such as labor and capital), the total output produced will increase, but not necessarily double; in fact, it will increase by a smaller amount than that. This concept implies that there may be inefficiencies in production processes as the scale of production enlarges. Factors contributing to decreasing returns to scale can include management challenges, difficulties in coordinating larger operations, or resource limitations that do not scale efficiently. The other options describe different scenarios related to production functions. For instance, a situation where output increases proportionately with all inputs would represent constant returns to scale, while the notion of output decreasing with an increase in inputs denotes diminishing marginal returns, not specifically decreasing returns to scale. Lastly, output remaining constant regardless of input changes reflects an entirely different scenario that does not align with the concept of returns to scale.