Question

What are increasing, constant, and decreasing returns to scale? How are they related to the shape of the long-run average cost curve?

Answer 1

Increasing returns to scale is when inputs are doubled then outputs are more than doubled. In case of constant returns to scale when inputs are doubled, output is exactly doubled. In case of decreasing returns to scale when inputs are doubled output is less than doubled. In case of increasing returns to scale the long run average cost curve will be downward sloping as average costs fall. In case of constant returns to scale the average cost curve will be flat. In case of decreasing returns to scale the long run average cost curve will be upward sloping as here we are experiencing diseconomies of scale.