Question

When does a production function satisfy decreasing returns to scale?

Answer 1

Decreasing returns to scale (DRS) holds when a proportional increase in all the factors of production leads to an increase in the output by less than the proportion. For example, if both labour and capital are increased by ‘n’ times but the resultant increase in output is less than ‘n’ times, then we say that the production function exhibits DRS.

Algebraically, DRS exists when

f(nL, nK) < n. f(L, K)