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Industrial Organisation 2022

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Question:

What is the difference between law of diminishing returns and returns to scale?

Author: Hjalmer Pedersen



Answer:

Law of diminishing returns says, holding either K or L fixed, that increasing the non fixed production variable with 1 will lead to a decreasing output. Returns to scale is a contribution of all input factors to firm’s output when all input factors are variable. RTS govern the relationship between output and all inputs. LODR is a short run concept as one production factor is held fixed. RTS is a long run concept as both capital and labor is variable.


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