Consider a production function $q = f (x_1, x_2)$ where the firm produces q amount of output using $x_1$ amount of factor 1 and $x_2$ amount of factor 2. Now suppose the firm decides to increase the employment level of both the factors t (t > 1) times.

Identify the correct statement from the following.

Option 1 -> This is the definition of constant returns to scale where proportional increase in inputs leads to proportional increase in output.

Option 2 -> This condition actually implies increasing returns to scale (not decreasing), where output increases more than proportionally.

Option 3 -> This condition actually implies decreasing returns to scale (not increasing), where output increases less than proportionally.

Option 4 -> This implies output remains unchanged despite increasing inputs, which represents zero returns to scale, not constant returns.

Hence, Option 1: f(tx₁, tx₂) = tf(x₁, x₂) implies constant returns to scale -> Constant returns to scale (CRS) occurs when scaling all inputs by factor t results in output scaling by the same factor t. For example, if a firm doubles both labor and capital (t=2), and output exactly doubles, the production function exhibits CRS. This is precisely what f(tx₁, tx₂) = tf(x₁, x₂) represents mathematically. CRS is commonly observed in industries where replication of production processes is feasible -> correct