Increasing returns to scale suggests that

Analyze the question The question asks what "increasing returns to scale" implies for a firm.

Explain the concept Returns to scale describe what happens to output in the long run when all factor inputs are increased in the same proportion.

• Increasing returns to scale: output rises by a larger proportion than inputs. For example, doubling all inputs more than doubles output.
• Constant returns to scale: output rises in the same proportion as inputs.
• Decreasing returns to scale: output rises by a smaller proportion than inputs.

With increasing returns, the average (per-unit) cost of production falls as output expands. This is the basis of economies of scale. Lower unit costs mean the firm can earn more profit by producing more.

Evaluate the options

• A. Make a profit by reducing output: Wrong. Increasing returns favour expanding output, not cutting it.
• B. Make more profit by increasing output: Correct. Output grows faster than inputs, so unit cost falls and profit can rise as the firm expands.
• C. Reducing raw materials makes marginal product double: Wrong. This has no link to returns to scale.
• D. Increasing raw materials makes marginal product fall: Wrong. This describes the law of diminishing returns, a short-run idea where only one input is varied. It is not returns to scale.

Exam tip Don't confuse the two ideas:

• Returns to scale means the long run, with all inputs changing.
• Law of diminishing (variable) returns means the short run, with one input changing while the others are fixed.

If an option mentions only one input, such as raw materials, and says marginal product falls, it is describing diminishing returns, not returns to scale.