Suppose that the production function y=f(x_1,x_2) (where: y is output level, x_1 is a variable input...
Suppose that the production function y=f(x_1,x_2) (where: y is output level, x_1 is a variable input and x_2 is a fixed input), is plotted in the (y, x_1) space. According to economic theory, we would expect:
a. y to increase with x_1 at a decreasing rate, due to increasing returns to scale.
b. y to increase with x_1 at an increasing rate, due to diminishing returns to scale.
c. y to increase with x_1 at a decreasing rate, due to diminishing returns to scale.
d. y to increase with x_1 at an increasing rate, due to increasing returns to scale.
Please explain!
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