Question

If we have constant returns to scale and we increase the quantity of labour ($X_1$) used per unit of time by 20% but keep the amount of capital ($X_2$) constant, the output will:

• A. Increase by 20%.
• B. Decrease by 20%.
• C. Increase by more than 20%.
• D. Increase by less than 20%.

Hint:

Under CRS, if only one input increases by $x$%, output will always increase by less than $x$% because of the law of diminishing marginal productivity of the variable input.

Answer 1

The Correct Option is D