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CUET Economics 2025 PYQs13 May Shift 2. Free, no login required.

Micro

past year questions, CUET Economics 2025 13 May Shift 2

Production & Costs

past year questions, Micro, CUET Economics 2025 13 May Shift 2

Medium

Comprehension:

Increasing return to scale (IRS) implies that if we increase all the inputs by a certain proportion, output increases by more than that proportion. In other words, to increase output by a certain proportion, inputs need to be increased by less than that proportion. With the input prices given, cost also increases by a lesser proportion. For example, suppose we want to double the output. To do that, inputs need to be increased, but less than double. The cost that the firm incurs to hire those inputs therefore also need to be increased by less than double. What is happening to the average cost here? It must be the case that as long as IRS operates, average cost falls as the firm increases output. Decreasing return to scale (DRS) implies that if we want to increase the output by a certain proportion, inputs need to be increased by more than that proportion. As a result, cost also increases by more than that proportion. So, as long as DRS operates, the average cost must be rising as the firm increases output. Constant return to scale (CRS) implies a proportional increase in inputs resulting in a proportional increase in output. So the average cost remains constant as long as CRS operates. It is argued that in a typical firm IRS is observed at the initial level of production. This is then followed by the CRS and then by the DRS. Accordingly, the LRAC curve is a ‘U’-shaped curve. Its downward sloping part corresponds to IRS and upward rising part corresponds to DRS. At the minimum point of the LRAC curve, CRS is observed.

To increase the output by a certain proportion, if inputs need to be increased by more than that proportion, that condition lies in which of the following?

Solution

✅ Correct Option: 2

Option 1 -> In increasing returns to scale, output increases by MORE than the proportionate increase in inputs (e.g., double inputs lead to more than double output).

Option 2 -> In decreasing returns to scale, inputs must be increased by MORE than a certain proportion to achieve that proportionate increase in output (e.g., to double output, inputs must be more than doubled).

Option 3 -> In constant returns to scale, output increases by exactly the same proportion as inputs (e.g., double inputs lead to exactly double output).

Option 4 -> This is not a standard economic term for returns to scale.

Hence, Decreasing return to scale -> When a production function exhibits decreasing returns to scale, it means the output grows at a slower rate than the increase in inputs. If a firm wants to increase output by, say, 20%, it would need to increase all inputs by more than 20% (perhaps 30% or 40%). This typically occurs when a firm becomes too large and faces coordination problems, management inefficiencies, or resource constraints. For example, if doubling all inputs results in less than double the output, the firm is experiencing decreasing returns to scale. -> correct

More from this set:

Question 41

In which of the following conditions, output increases with the same proportion of input?

Question 42

When we have proportionately more output than input this economic concept is known as .........

Question 43

In which condition, the average cost of a firm declines when output increases?

Question 44

In a long run average cost curve which point is said to be the constant return to scale?

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