CUET UG Economics Booster Test 2

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CUET UG Economics Booster Test 2 - Returns to Scale

⏱️ 30 Minutes

❓ 20 Questions

📌 Answers are locked once submitted — results and explanations appear at the end.

CUET UG Economics Booster Test 2 - Returns to Scale

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QUESTION 1 OF 20

A long-run production scale alteration inherently requires that __________, unlike the short run where at least one factor is fixed.

Answer Review

1 A long-run production scale alteration inherently requires that __________, unlike the short run where at least one factor is fixed.

A only the fixed costs change

B factors are scaled up simultaneously in the same proportion

C the variable proportions law applies

D labour remains constant

💡 Short Explanation

�� In the long run, all inputs are variable. �� Returns to Scale studies proportional changes in all inputs. �� Inputs are increased simultaneously.

✅ Correct Answer Explanation

Returns to Scale is a long-run concept because, in the long run, all factors of production are variable. To examine Returns to Scale, every input (such as labour and capital) is increased by the same proportion. Therefore, Option B is correct. Option A is incorrect because Returns to Scale concerns inputs and output, not merely fixed costs. Option C is incorrect because the Law of Variable Proportions applies to the short run, where one factor is fixed. Option D is incorrect because labour is also variable in the long run.

❓ Why Other Options Are Incorrect

�� Option A → Fixed costs are not the defining feature of long-run scaling.
�� Option C → Law of Variable Proportions is a short-run concept.
�� Option D → Labour is not fixed in the long run.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Identify whether the question refers to a long-run or short-run production concept.

Final Logic:

Long Run = All Inputs Change Together.

🧠 Memory Trick

Long Run = All Inputs Variable

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Long Run and Returns to Scale

2 Arrange the steps to test a production function for returns to scale:
1. Observe the proportional increase in the total output f(tx₁, tx₂).
2. Determine the initial output level f(x₁, x₂) with existing inputs.
3. Increase both input factors simultaneously by a scaling factor t (t > 1).

A 2 → 3 → 1

B 1 → 2 → 3

C 3 → 2 → 1

D 2 → 1 → 3

💡 Short Explanation

�� Start with the initial production level. �� Increase all inputs proportionately. �� Compare the resulting output.

✅ Correct Answer Explanation

To determine Returns to Scale: Step 1: Find the original output f(x₁, x₂). Step 2: Increase all inputs by the same scaling factor t. Step 3: Observe the new output f(tx₁, tx₂) and compare it with t·f(x₁, x₂). Hence, the correct order is: 2 → 3 → 1 Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → Observation cannot occur before scaling inputs.
�� Option C → Inputs cannot be scaled before knowing the original output.
�� Option D → The comparison requires scaling before observing the new output.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Arrange the logical sequence of testing Returns to Scale.

Final Logic:

Original Output → Scale Inputs → Compare Output.

🧠 Memory Trick

Original → Scale → Compare

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Measuring Returns to Scale

3 Which of the following scenarios depict Proportional Output Growth in CRS?
1. Doubling inputs exactly doubles output.
2. Halving inputs halves output.
3. Tripling inputs quadruples output.

A 1 only

B 1 and 2 only

C 2 and 3 only

D 1, 2, and 3

💡 Short Explanation

�� CRS means equal proportional changes. �� Doubling and halving maintain the same proportion. �� Quadrupling output after tripling inputs indicates IRS.

✅ Correct Answer Explanation

Under Constant Returns to Scale (CRS), output changes in exactly the same proportion as all inputs. Statement 1 is correct because doubling inputs doubles output. Statement 2 is correct because halving inputs halves output. Statement 3 is incorrect because tripling inputs producing four times output indicates Increasing Returns to Scale (IRS). Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

�� Option A → Statement 2 is also correct.
�� Option C → Statement 3 represents IRS.
�� Option D → All three statements are not correct.

🎯 Strategy

Used

Option Grouping

Application:

Check whether each output changes in exactly the same proportion as inputs.

Final Logic:

Equal Proportion = CRS.

🧠 Memory Trick

CRS = Same Percentage Change

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Constant Returns to Scale

4 Match the mathematical terms to their function in the CRS identity f(tx₁, tx₂) = t.f(x₁, x₂):

List I	List II
P. t	1. Initial maximum output
Q. x₁, x₂	2. Factor scaling multiplier
R. f(x₁, x₂)	3. Factor 1 and Factor 2 amounts

A P-2, Q-3, R-1

B P-1, Q-2, R-3

C P-3, Q-1, R-2

D P-2, Q-1, R-3

💡 Short Explanation

�� t represents the scaling factor. �� x₁ and x₂ are the input quantities. �� f(x₁, x₂) represents the original maximum output.

✅ Correct Answer Explanation

In the CRS equation: f(tx₁, tx₂) = t.f(x₁, x₂) t is the factor scaling multiplier, indicating that every input is multiplied by the same proportion. x₁ and x₂ represent the quantities of the two production inputs (such as labour and capital). f(x₁, x₂) denotes the initial maximum output produced with the original inputs. Thus, P → 2 Q → 3 R → 1 Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → Incorrectly identifies t as the output and x₁, x₂ as the scaling factor.
�� Option C → All three mathematical terms are incorrectly matched.
�� Option D → f(x₁, x₂) represents output, not the input quantities.

🎯 Strategy

Used

Substitution

Application:

Identify the meaning of every symbol in the CRS mathematical identity.

Final Logic:

t = Scale
x₁, x₂ = Inputs
f(x₁, x₂) = Original Output

🧠 Memory Trick

f → Output

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Constant Returns to Scale Mathematical Identity

5 Assertion (A): Under IRS, the ratio of new output to old output is greater than the scaling factor t.
Reason (R): IRS implies that f(tx₁, tx₂) > t.f(x₁, x₂), meaning output grows by a larger proportion.

A Both A and R are true and R is the correct explanation of A

B Both A and R are true but R is not the correct explanation of A

C A is true but R is false

D A is false but R is true

💡 Short Explanation

�� IRS means output grows faster than inputs. �� Output exceeds the proportional increase represented by t. �� The Reason correctly explains the Assertion.

✅ Correct Answer Explanation

Under Increasing Returns to Scale (IRS), f(tx₁, tx₂) > t.f(x₁, x₂) This means that when all inputs are increased by the factor t, output increases by more than t times. Therefore, New Output / Old Output > t Hence, both the Assertion and the Reason are true, and the Reason correctly explains why the output ratio exceeds t. Thus, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → The Reason directly explains the Assertion.
�� Option C → The Reason is a correct mathematical definition of IRS.
�� Option D → Both the Assertion and the Reason are true.

🎯 Strategy

Used

Elimination

Application:

Check whether both statements are correct and whether the Reason explains the Assertion.

Final Logic:

IRS ⇒ Output grows more than proportionately.

🧠 Memory Trick

IRS = More Output Than t

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Increasing Returns to Scale

6 If an initial output is q₀ = 100 using (x₁, x₂), scaling inputs by t = 3 under IRS logic dictates that the new output must be __________.

A exactly 300

B strictly greater than 300

C strictly less than 300

D exactly 100

💡 Short Explanation

�� IRS means output increases more than proportionately. �� Scaling inputs by 3 gives output greater than 3 times. �� New output must exceed 300.

✅ Correct Answer Explanation

Under Increasing Returns to Scale (IRS), f(tx₁, tx₂) > t.f(x₁, x₂) Given: Initial output (q₀) = 100 Scaling factor (t) = 3 Under CRS, output would become exactly: 3 × 100 = 300 But under IRS, output increases by more than three times. Therefore, the new output must be greater than 300. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

�� Option A → Exactly 300 represents Constant Returns to Scale (CRS).
�� Option C → Less than 300 represents Decreasing Returns to Scale (DRS).
�� Option D → Output cannot remain unchanged when all inputs increase.

🎯 Strategy

Used

Substitution

Application:

Apply the IRS inequality directly to the given numerical values.

Final Logic:

IRS ⇒ Output > 3 × 100 = 300.

🧠 Memory Trick

IRS = More Than Multiply

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Increasing Returns to Scale

7 Which of the following real-world outcomes mirrors the "Smaller Output Proportions" of DRS?

A A 50% increase in labour and capital yields a 40% increase in output.

B A 50% increase in labour and capital yields a 60% increase in output.

C A 50% increase in labour and capital yields a 50% increase in output.

D A 50% decrease in labour and capital yields a 60% decrease in output.

💡 Short Explanation

�� DRS means output grows less than inputs. �� Inputs rise by 50%, output rises by only 40%. �� Output increases by a smaller proportion.

✅ Correct Answer Explanation

Decreasing Returns to Scale (DRS) occurs when output increases by a smaller proportion than all inputs. Here, Inputs increase by 50% Output increases by only 40% Since 40% < 50%, this is a clear example of DRS. Therefore, Option A is correct. Option B represents IRS because output increases more than inputs. Option C represents CRS because output and inputs increase equally. Option D is unrelated to the standard definition of DRS.

❓ Why Other Options Are Incorrect

�� Option B → Output grows more than inputs, indicating IRS.
�� Option C → Equal proportional growth indicates CRS.
�� Option D → The question concerns increasing inputs, not decreasing them.

🎯 Strategy

Used

Dimensional/Unit Analysis

Application:

Compare the percentage increase in output with the percentage increase in inputs.

Final Logic:

Output < Inputs ⇒ DRS.

🧠 Memory Trick

DRS = Less Output Growth

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Decreasing Returns to Scale

8 Match the scale change to the algebraic outcome identifying DRS (assuming an initial output of q₀).

List I	List II
1. Input scaled by t = 2	a. Output becomes 1.2 × q₀
2. Input scaled by t = 1.5	b. Output becomes 1.8 × q₀
3. Output multiplier is less than the input multiplier	c. Decreasing Returns to Scale (DRS)
4. f(tx₁, tx₂) < t·q₀	d. General mathematical condition for DRS

A 1-b, 2-a, 3-c, 4-d

B 1-a, 2-b, 3-d, 4-c

C 1-a, 2-a, 3-c, 4-d

D 1-b, 2-b, 3-d, 4-c

💡 Short Explanation

�� Under DRS, output increases by a smaller proportion than inputs. �� Doubling inputs results in less than double output. �� The output multiplier is always less than the input multiplier.

✅ Correct Answer Explanation

According to NCERT, Decreasing Returns to Scale (DRS) occur when all inputs are increased proportionately but output increases by a smaller proportion. 1 → b When the input scaling factor is t = 2, the output must be less than 2q₀. Among the given values, 1.8q₀ satisfies this condition. Therefore, 1 → b. 2 → a When the input scaling factor is t = 1.5, the output must be less than 1.5q₀. Among the given values, 1.2q₀ satisfies this condition. Therefore, 2 → a. 3 → c The defining feature of Decreasing Returns to Scale is that the output multiplier is smaller than the input multiplier. Therefore, 3 → c. 4 → d The general mathematical representation of DRS is f(tx₁, tx₂) < t·q₀. Therefore, 4 → d. Thus, the correct matching is: 1 → b 2 → a 3 → c 4 → d Hence, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → Incorrect because the output multipliers are matched opposite to the given scaling factors.
�� Option C → Incorrect because both scaling factors cannot produce the same output multiplier.
�� Option D → Incorrect because both output multipliers cannot correspond to the two different scaling factors.

🎯 Strategy

Used: Substitution

Application:

Compare each output multiplier directly with its corresponding input scaling factor and verify that the output multiplier is smaller, as required under DRS.

Final Logic:

Output Multiplier < Input Multiplier ⇒ DRS

🧠 Memory Trick

DRS → Smaller Multiplier

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Decreasing Returns to Scale; Mathematical Representation of Returns to Scale

9 Arrange the algebraic steps to prove the scale property of q = x₁^α × x₂^β:
1. Factor out t^(α+β).
2. Substitute x₁ with tx₁ and x₂ with tx₂.
3. Conclude Returns to Scale based on whether α + β is <, =, or > 1.
4. Express new output as (tx₁)^α × (tx₂)^β.

A 4 → 2 → 1 → 3

B 1 → 2 → 3 → 4

C 2 → 4 → 1 → 3

D 2 → 1 → 4 → 3

💡 Short Explanation

�� Replace inputs with scaled inputs. �� Expand the expression. �� Factor out t^(α+β) and classify Returns to Scale.

✅ Correct Answer Explanation

To derive Returns to Scale for the Cobb-Douglas production function: 1. Replace the inputs by tx₁ and tx₂. 2. Write the expression as (tx₁)^α × (tx₂)^β. 3. Factor out t^(α+β). 4. Compare α + β with 1 to classify CRS, IRS or DRS. Thus, the correct sequence is: 2 → 4 → 1 → 3 Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

�� Option A → The algebraic expression must first be formed.
�� Option B → Factoring cannot occur before substitution.
�� Option D → The expression cannot be factored before it is written.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Follow the logical order of algebraic derivation.

Final Logic:

Substitute → Expand → Factor → Classify.

🧠 Memory Trick

(Substitute → Expand → Factor → Classify)

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Cobb-Douglas Production Function

10 In the Cobb-Douglas equation q = x₁^α × x₂^β, which statements correctly identify algebraic returns classification?
1. If α = 0.4 and β = 0.6, the firm is in CRS.
2. If α = 0.5 and β = 0.7, the firm is in DRS.
3. If α = 0.3 and β = 0.5, the firm is in DRS.

A 1 and 2 only

B 1 and 3 only

C 2 and 3 only

D 1, 2, and 3

💡 Short Explanation

�� Sum of exponents determines Returns to Scale. �� Sum = 1 → CRS. �� Sum < 1 → DRS; Sum > 1 → IRS.

✅ Correct Answer Explanation

Calculate the sum of the exponents: Statement 1: 0.4 + 0.6 = 1 ⇒ CRS ✔ Statement 2: 0.5 + 0.7 = 1.2 ⇒ IRS, not DRS ✘ Statement 3: 0.3 + 0.5 = 0.8 ⇒ DRS ✔ Thus, Statements 1 and 3 are correct. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

�� Option A → Statement 2 is incorrect because the sum exceeds 1.
�� Option C → Statement 1 is also correct.
�� Option D → Statement 2 is false.

🎯 Strategy

Used

Substitution

Application:

Add the exponents and compare the total with 1.

Final Logic:

=1 → CRS
>1 → IRS
<1 → DRS

🧠 Memory Trick

Add α + β First

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Cobb-Douglas Returns to Scale

11 Assertion (A): A typical firm doesn't experience only one type of Returns to Scale throughout its long-run production path.
Reason (R): Firms typically transition from IRS initially, pass through CRS, and eventually face DRS as they continue to expand output.

A Both A and R are true and R is the correct explanation of A.

B Both A and R are true but R is not the correct explanation of A.

C A is true but R is false.

D A is false but R is true.

💡 Short Explanation

�� Firms experience different Returns to Scale over time. �� The usual sequence is IRS → CRS → DRS. �� The Reason correctly explains the Assertion.

✅ Correct Answer Explanation

A typical firm's long-run production path does not remain under a single type of Returns to Scale. Initially, firms experience Increasing Returns to Scale (IRS) due to economies of scale. As production expands further, they reach Constant Returns to Scale (CRS). Beyond this stage, managerial and operational inefficiencies lead to Decreasing Returns to Scale (DRS). Therefore, both the Assertion and the Reason are true, and the Reason correctly explains the Assertion. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → The Reason directly explains why firms experience different Returns to Scale.
�� Option C → The Reason is true according to NCERT.
�� Option D → Both the Assertion and the Reason are true.

🎯 Strategy

Used

Elimination

Application:

Check whether both statements are true and whether the Reason explains the Assertion.

Final Logic:

Typical Firm: IRS → CRS → DRS.

🧠 Memory Trick

Grow → Balance → Decline

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Returns to Scale Transition

12 The transition from IRS to DRS implies that the long-run marginal cost curve (LRMC) will eventually cut the LRAC curve from __________.

A above at the maximum point

B below at the minimum point

C the left at the origin

D the right at infinity

💡 Short Explanation

�� LRMC intersects LRAC at its minimum. �� Before the minimum, LRMC is below LRAC. �� After the minimum, LRMC rises above LRAC.

✅ Correct Answer Explanation

As output increases: During IRS, LRAC falls and LRMC remains below LRAC. At the minimum point of LRAC (CRS), LRMC equals LRAC. Afterwards, during DRS, LRMC becomes greater than LRAC. Thus, LRMC cuts LRAC from below at its minimum point. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

�� Option A → LRAC has a minimum point, not a maximum point.
�� Option C → LRMC does not intersect LRAC at the origin.
�� Option D → The intersection occurs at the minimum point, not at infinity.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Recall the relationship between LRMC and LRAC from the LRAC graph.

Final Logic:

LRMC < LRAC → LRMC = LRAC → LRMC > LRAC

🧠 Memory Trick

MC Cuts AC at Minimum

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: LRMC and LRAC Relationship

13 When evaluating proportionate input requirements under different scales, which of the following hold?
1. To double output in CRS, inputs must exactly double.
2. To double output in IRS, inputs must increase by less than double.
3. To double output in DRS, inputs can increase by less than double.

A 1, 2, and 3

B 2 and 3 only

C 1 and 3 only

D 1 and 2 only

💡 Short Explanation

�� CRS requires equal proportional increases. �� IRS requires less-than-proportional input increases. �� DRS requires more-than-proportional input increases.

✅ Correct Answer Explanation

Statement 1 is correct because under CRS, doubling output requires doubling all inputs. Statement 2 is correct because under IRS, output increases more rapidly than inputs, so less than double inputs are needed. Statement 3 is incorrect because under DRS, inputs must increase by more than double to double output. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

�� Option A → Statement 3 is false.
�� Option B → Statement 3 is incorrect.
�� Option C → Statement 2 is also correct.

🎯 Strategy

Used

Option Grouping

Application:

Evaluate each statement separately using CRS, IRS and DRS definitions.

Final Logic:

CRS = Equal
IRS = Less Input
DRS = More Input

🧠 Memory Trick

Equal–Less–More

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Input Requirements under Returns to Scale

14 Match the Input Doubling Effects (scaling by 2) on Cost to the Scale Return:

List I	List II
P. Cost incurred doubles	1. IRS
Q. Cost incurred more than doubles	2. DRS
R. Cost incurred less than doubles	3. CRS

A P-3, Q-2, R-1

B P-1, Q-2, R-3

C P-3, Q-1, R-2

D P-2, Q-3, R-1

💡 Short Explanation

�� CRS doubles cost. �� DRS increases cost by more than double. �� IRS increases cost by less than double.

✅ Correct Answer Explanation

When output is doubled: Under CRS, inputs double exactly, so cost doubles. Under DRS, more than double inputs are required, so cost more than doubles. Under IRS, less than double inputs are required, so cost less than doubles. Hence, P → 3 Q → 2 R → 1 Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → Incorrectly matches CRS with IRS.
�� Option C → IRS and DRS are interchanged.
�� Option D → Cost relationships are incorrectly matched.

🎯 Strategy

Used

Option Grouping

Application:

Associate each cost change with the correct Returns to Scale.

Final Logic:

Double–More–Less = CRS–DRS–IRS

🧠 Memory Trick

DRS = More Cost

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Cost Implications of Returns to Scale

15 Match the Returns to Scale with the long-run average cost (LRAC) reduction/increase impact.

List I	List II
1. Average cost falls	a. Decreasing Returns to Scale (DRS) Cost Increases
2. Average cost rises	b. Increasing Returns to Scale (IRS) Cost Reductions
3. LRMC is less than LRAC	c. LRAC is pulled downward
4. LRMC is greater than LRAC	d. LRAC is pushed upward

A 1-a, 2-b, 3-d, 4-c

B 1-a, 2-a, 3-c, 4-d

C 1-b, 2-a, 3-c, 4-d

D 1-b, 2-b, 3-d, 4-c

💡 Short Explanation

�� Increasing Returns to Scale reduce average cost. �� Decreasing Returns to Scale increase average cost. �� LRMC determines whether LRAC falls or rises.

✅ Correct Answer Explanation

According to NCERT, Returns to Scale affect the behaviour of the Long Run Average Cost (LRAC) curve. 1 → b Under Increasing Returns to Scale (IRS), firms experience economies of scale. As production expands, the Long Run Average Cost (LRAC) falls. Therefore, 1 → b. 2 → a Under Decreasing Returns to Scale (DRS), firms experience diseconomies of scale. Consequently, the Long Run Average Cost (LRAC) rises. Therefore, 2 → a. 3 → c When Long Run Marginal Cost (LRMC) is less than Long Run Average Cost (LRAC), it pulls the average cost downward. Therefore, 3 → c. 4 → d When Long Run Marginal Cost (LRMC) exceeds Long Run Average Cost (LRAC), it pushes the average cost upward. Therefore, 4 → d. Thus, the correct matching is: 1 → b 2 → a 3 → c 4 → d Hence, Option C is correct.

❓ Why Other Options Are Incorrect

�� Option A → Incorrect because IRS and DRS are interchanged, and the LRMC–LRAC relationships are also reversed.
�� Option B → Incorrect because average cost cannot both fall and rise under DRS.
�� Option D → Incorrect because average cost cannot both fall and rise under IRS, and the LRMC–LRAC relationships are incorrect.

🎯 Strategy

Used

Option Grouping

Application:

Relate each movement of LRAC with the corresponding Returns to Scale and LRMC relationship explained in NCERT.

Final Logic:

IRS → Falling LRAC
DRS → Rising LRAC
LRMC < LRAC → LRAC Falls
LRMC > LRAC → LRAC Rises

🧠 Memory Trick

DRS ↑ Cost

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Relationship between Long Run Average Cost (LRAC), Long Run Marginal Cost (LRMC), and Returns to Scale

16 The logic behind DRS Cost Increases is that if you want to increase output by a certain proportion, you must buy ______________, thereby driving average costs up.

A inputs by a much smaller proportion

B inputs by more than that proportion

C only fixed assets

D the same proportion of inputs at a higher price

💡 Short Explanation

�� DRS means output grows less than inputs. �� More inputs are required to achieve the same output increase. �� Average cost rises because production becomes less efficient.

✅ Correct Answer Explanation

Under Decreasing Returns to Scale (DRS), output increases by a smaller proportion than the increase in inputs. Therefore, if a firm wants to increase output by a certain percentage, it must increase inputs by more than that percentage. This leads to: Higher production cost Rising Long Run Average Cost (LRAC) Diseconomies of scale Hence, Option B is correct. Option A describes IRS. Option C is incorrect because all relevant inputs may need to increase. Option D is incorrect because DRS concerns quantities of inputs, not higher input prices.

❓ Why Other Options Are Incorrect

�� Option A → Less-than-proportionate input increases occur under IRS.
�� Option C → DRS involves increasing all necessary inputs, not only fixed assets.
�� Option D → The concept depends on input quantities rather than input prices.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Recall the definition of Decreasing Returns to Scale and relate it to production costs.

Final Logic:

DRS ⇒ More Inputs ⇒ Higher Average Cost

🧠 Memory Trick

DRS = More Input → More Cost

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Cost Implications of Decreasing Returns to Scale

17 Arrange the positional relation of Long Run Marginal Cost (LRMC) and Long Run Average Cost (LRAC) as output increases over the long run:
1. LRMC is greater than LRAC.
2. LRMC is less than LRAC.
3. LRMC equals LRAC at the minimum point.

A 2 → 1 → 3

B 1 → 3 → 2

C 3 → 2 → 1

D 2 → 3 → 1

💡 Short Explanation

�� Initially, LRMC lies below LRAC. �� At the minimum LRAC, LRMC equals LRAC. �� Afterwards, LRMC lies above LRAC.

✅ Correct Answer Explanation

As output expands: During the falling portion of the LRAC curve, LRMC < LRAC. At the minimum point of the LRAC curve, LRMC = LRAC. During the rising portion of the LRAC curve, LRMC > LRAC. Thus, the correct sequence is: 2 → 3 → 1 Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

�� Option A → LRMC cannot become greater before it equals LRAC.
�� Option B → LRMC does not start above LRAC.
�� Option C → Equality occurs only after LRMC has been below LRAC.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Recall the standard LRMC–LRAC relationship on the cost curves.

Final Logic:

Below → Equal → Above

🧠 Memory Trick

Below → Equal → Above

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: LRMC and LRAC Relationship

18 A firm finds itself in a Constant Scale Region precisely at the __________ of the LRAC curve, where proportional input expansion perfectly matches proportional output growth.

A origin

B maximum point

C minimum point

D point of inflection

💡 Short Explanation

�� CRS occurs where LRAC is lowest. �� LRMC equals LRAC at this point. �� It separates IRS from DRS.

✅ Correct Answer Explanation

The minimum point of the LRAC curve represents Constant Returns to Scale (CRS). At this point: Inputs and output increase in the same proportion. Average cost is minimum. LRMC intersects LRAC. Hence, Option C is correct. Option A is unrelated. Option B is incorrect because LRAC has a minimum, not a maximum. Option D is not the NCERT description for CRS.

❓ Why Other Options Are Incorrect

�� Option A → CRS is not observed at the origin.
�� Option B → LRAC does not have a maximum point.
�� Option D → The point of inflection is not used to define CRS.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Recall the U-shaped LRAC curve and identify where CRS occurs.

Final Logic:

Minimum LRAC = CRS

🧠 Memory Trick

Minimum Cost = CRS

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Constant Scale Region and LRAC

📄 Passage

"Let us check how the LRMC curve looks like. For the first unit of output, both LRMC and LRAC are the same. Then, as output increases, LRAC initially falls, and then, after a certain point, it rises. As long as average cost is falling, marginal cost must be less than the average cost. When the average cost is rising, marginal cost must be greater than the average cost."

Based on the passage, what defines the geometric relationship between the LRMC and LRAC curves when LRAC is rising?

A LRMC curve coincides with LRAC

B LRMC curve is less than LRAC

C LRMC curve is strictly horizontal

D LRMC curve is greater than LRAC

💡 Short Explanation

�� Rising LRAC means average cost is increasing. �� Marginal cost must exceed average cost. �� LRMC lies above LRAC.

✅ Correct Answer Explanation

According to the passage and NCERT: When LRAC is falling, LRMC < LRAC. At the minimum point, LRMC = LRAC. When LRAC is rising, LRMC > LRAC. Therefore, during the rising portion of the LRAC curve, the LRMC curve is greater than the LRAC curve. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

�� Option A → LRMC equals LRAC only at the minimum point.
�� Option B → LRMC is below LRAC only when LRAC is falling.
�� Option C → LRMC is not a horizontal curve.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Use the information directly stated in the passage.

Final Logic:

Rising LRAC ⇒ LRMC > LRAC

🧠 Memory Trick

Rising AC → MC Above

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: LRMC and LRAC Relationship

📄 Passage

Which scale behaviour causes the LRAC to initially fall, ensuring LRMC remains less than LRAC?

A Constant Returns to Scale

B Increasing Returns to Scale

C Decreasing Returns to Scale

D Law of Variable Proportions

💡 Short Explanation

�� IRS creates economies of scale. �� Average cost falls initially. �� LRMC remains below LRAC during this phase.

✅ Correct Answer Explanation

The initial downward-sloping portion of the LRAC curve is caused by Increasing Returns to Scale (IRS). During IRS: Output increases more than proportionately. Average cost falls. LRMC remains below LRAC, causing LRAC to decline. Therefore, Option B is correct. Option A corresponds to the minimum point of LRAC. Option C causes LRAC to rise. Option D is a short-run concept and is unrelated to LRAC.

❓ Why Other Options Are Incorrect

�� Option A → CRS occurs only at the minimum point of LRAC.
�� Option C → DRS results in rising LRAC.
�� Option D → The Law of Variable Proportions applies only to the short run.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Relate the downward-sloping LRAC with the corresponding Returns to Scale.

Final Logic:

IRS → Falling LRAC → LRMC < LRAC

🧠 Memory Trick

IRS = Falling LRAC

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: LRAC Curve and Returns to Scale

CUET UG Economics Booster Test 2 - Returns to Scale

Test Complete!

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