Can a firm have a production function that exhibits increasing returns to scale, constant returns to scale, and decreasing returns to scale as output increases? Discuss.
A. No. The functional form of the production technology dictates the type of returns to scales it exhibits, and there will only be one of the three types of returns to scale exhibited throughout the range of production possibilities.
B. Yes. At low levels of output, increasing marginal returns lead to increasing returns to scale. Then, at intermediate levels of output, diminishing marginal returns lead to constant returns to scale. And finally, for large scale operations, logistical and bureaucratic problems can lead to decreasing returns to scale.
C. Yes. At low levels of output, specialization leads to increasing returns to scale. Once specialization has been exhausted, proportional increases in all inputs lead to constant returns to scale. And finally, for large scale operations, logistical and bureaucratic problems can lead to decreasing returns to scale
D. No. The functional form of the production technology dictates the type of returns to scale it exhibits. While a production function can exhibit both increasing returns and constant returns to scale at different levels of output, increasing returns and decreasing returns to scale are mutually exclusive.
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