Question

1. A firm hires 2 workers and rents 15 acres of land. With these inputs it can produce 100,000 bushels of If it doubles its land and labor, it can produce 300,000 bushels of corn. Does this firm face increasing, decreasing or constant returns to scale?
2. Graph a hypothetical average total cost curve. Explain why the graph takes this
3. Graph a hypothetical average fixed cost Explain why the graph takes this shape.
4. How does a producer decide the optimal amount of one variable input to purchase? How does a producer decide what is the optimal combination of several variable inputs to purchase?
5. What are the characteristics of perfect competition?

Answer 1

Answer 1 - The firm is experiencing the increasing returns to scale. As the inputs are doubled , the output increases three times from 100000 to. 300000. Thus the increase in the inputs had a greater positive impact upon the level of output. So this will be called the increasing returns to scale.

If the output would have decreased , it would have been decreasing returns to scale. If the output would have increased in same proportion as increase in input , it would have been constant returns to scale.