The law of returns to scale is a _____ concept.
Options
AShort run
BLong run
CMarket period
DNone of the above
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Theory of Production and CostPYQ - Dec 2020Question 46 of 20
All Questions Correct Answer
✅ Option b — Long run
All Options:
- AShort run
- BLong run
- CMarket period
- DNone of the above
Detailed Solution & Explanation
To understand the law of returns to scale, we need to consider the concept of production and its relationship with the scale of production.
• The law of returns to scale explains how the output of a firm changes when all the inputs are increased proportionally.
• This concept is relevant in the long run, as it is the time period where all factors of production can be varied.
• In the long run, a firm can change the scale of production by increasing or decreasing all the inputs, which makes it possible to study the returns to scale.
The correct answer is related to the long run because it is the time period where the law of returns to scale is applicable.
• Option A, short run, is incorrect because in the short run, at least one factor of production is fixed, and the law of returns to scale cannot be applied.
• Option C, market period, is also incorrect because it is a very short time period where the output is fixed and the law of returns to scale is not relevant.
About This Chapter: Theory of Production and Cost
Paper
Paper 4: Business Economics
Weightage
10%
Key Topics
Function, Cost Concepts (Short/Long Run)
This chapter explores how firms produce goods and services. It covers Production Functions, the Laws of Returns (Increasing, Constant, Diminishing), and all cost concepts including Total Cost, Average Cost, Marginal Cost, Fixed Cost, and Variable Cost. Understanding why the AC and MC curves are U-shaped is crucial for exam success.
View Official ICAI SyllabusExam Strategy Tip
The relationship between MC and AC curves is a favorite examiner topic. Remember: MC cuts AC at its minimum point. Also focus on the difference between Short Run and Long Run cost curves.
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