Decreasing Returns to Scale from Input Doubling

Steps:

• Note inputs for output 100: capital 5, land 2, labour 4.
• Note inputs for output 150: capital 10, land 4, labour 8.
• All inputs doubled (scale factor of 2), but output rose from 100 to 150 (factor of 1.5).
• Output increased less than proportionally, indicating decreasing returns to scale.

Why B is correct:

• Diseconomies of scale occur when doubling all inputs less than doubles output, per the law of returns to scale.

Why the others are wrong:

• A: Constant returns require output to double with inputs doubled.
• C: External diseconomies involve industry-wide cost increases, not firm-level input-output ratios.
• D: External economies involve industry-wide cost reductions, irrelevant here.

Final answer: B