<p>Due to the presence of fixed costs returns to scale will be increasing at first.</p>
<hr />
<p>A simple example:</p>
<p>Suppose you are producing electricity (<span class="math-container">$y$</span>) from gas (<span class="math-container">$x$</span>) using a gas turbine. You need to burn 100 units of gas just to get the turbine moving fast enough; after that, <span class="math-container">$y$</span> units of electricity require <span class="math-container">$y^2$</span> additional units of gas. Gas is not free, let us say it costs 1 dollar per unit, so marginal cost of gas production is positive (<span class="math-container">$2y$</span>).</p>
<p>However, due to the large fixed cost, initially returns to scale will be increasing. First 100 units of input result in 0 output, 101 units result in an output of 1, 104 units result in an output of 2, 109 in an output of 3, etc. Output/per input will be maximal when 10 units of electricity is produced from 200 units of gas. After this, returns to scale will start to diminish. But it is not true that they were decreasing for the entire <span class="math-container">$y&gt;0$</span> range.</p>

CC BY-SA 4.0
2024-03-29T15:22:15.810Z
could you explain this pls: due to the large fixed cost, initially returns to scale will be increasing
Lex
CC BY-SA 4.0
2024-03-29T17:01:32.427Z
Could you please share how you define "increasing returns to scale" to make my explanation easier?
Giskard
CC BY-SA 4.0
2024-03-29T13:04:17.533Z
2024-03-29T13:04:17.533Z
Giskard
<p>I'm an econ student and there's this question from a past exam that I don't understand:</p>
<p>A company produces the output quantity y &gt; 0 with fixed costs F ≥ 0 and positive marginal costs.</p>
<p>For F &gt; 0 and increasing marginal costs, the technology exhibits diminishing returns to scale for all y &gt; 0. (FALSE)</p>

CC BY-SA 4.0
2024-03-29T12:53:58.703Z
Please try to give Q titles thar are informative!
Giskard
<marginal><returns-to-scale>
Increasing marginal costs and non-universal diminishing returns
Lex
# Increasing marginal costs and non-universal diminishing returns

(Asked by: username_0 on 2024-03-29)

I'm an econ student and there's this question from a past exam that I don't understand:

A company produces the output quantity y > 0 with fixed costs F ≥ 0 and positive marginal costs.

For F > 0 and increasing marginal costs, the technology exhibits diminishing returns to scale for all y > 0. (FALSE)

**Tags:** marginal, returns-to-scale
> **Comments:**
> **username_1**: Please try to give Q titles thar are informative!  

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## 1 answers

### Answer by username_1 on 2024-03-29. Score: 0

Due to the presence of fixed costs returns to scale will be increasing at first.

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A simple example:

Suppose you are producing electricity ($y$) from gas ($x$) using a gas turbine. You need to burn 100 units of gas just to get the turbine moving fast enough; after that, $y$ units of electricity require $y^2$ additional units of gas. Gas is not free, let us say it costs 1 dollar per unit, so marginal cost of gas production is positive ($2y$).

However, due to the large fixed cost, initially returns to scale will be increasing. First 100 units of input result in 0 output, 101 units result in an output of 1, 104 units result in an output of 2, 109 in an output of 3, etc. Output/per input will be maximal when 10 units of electricity is produced from 200 units of gas. After this, returns to scale will start to diminish. But it is not true that they were decreasing for the entire $y>0$ range.

> **Comments:**
> **username_0**: could you explain this pls: due to the large fixed cost, initially returns to scale will be increasing  
> **username_1**: Could you please share how you define "increasing returns to scale" to make my explanation easier?  

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