What is difference between a company\'s returns to labor and returns to scale? (

Question

What is difference between a company's returns to labor and returns to scale? (Please confirm that it is "A")

a. Returns to labor looks at the change in output when only the labor input is changing, whereas returns to scale looks at the change in output when all inputs are changing proportionally.

b. Returns to labor looks at the change in output when only the labor input is changing, whereas returns to scale looks at the change in output when only the capital input is changing.

c. Returns to labor looks at the change in output when only the labor input is fixed, whereas returns to scale looks at the change in output when all inputs are fixed.

d. Returns to labor looks at the change in output in the long run, whereas returns to scale looks at the change in output in the short run.

Based on the graph below how would we describe the returns to scale for this firm?

A. increasing returns to labor

B. economies of scale

C. constant returns to scale

D. decreasing returns to labor

E. diseconomies of scale

PLEASE CONFIRM THAT THE ANSWER IS "B" Thanks!

Long Run Average Cost Curves Average Cost Average cost of medium plant size,2 Average cost of large plant size, Long run average cost s1zen $50 $40 Average cost of small plant size Average 25 40 Output

Explanation / Answer

THE ABOVE SITUATION ARISES WHEN THE ECONOMIES OF SCALE COMES INTO PLAY BECAUSE OF THE LARGE AMOUNT OF DIVISION OF LABOR REQUIRED TO MANUFACTURE. THE PRODUCTION INCREASES MORE WITHOUT INCREASING THE COSTS BY MUCH. IN DIVISION OF LABOR DIFFERENT PARTS OF MANUFACTURING ARE ASSIGNED TO MORE PEOPLE TO GAIN EFFICIENCY IN PRODUCTION. THUS ECONOMIES OF SCALE DUE TO DIVISION OF LABOR MAKES LRAC TO DIMINISH OR DECREASE.

HENCE OPTION B IS CORRECT.

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