Roughly speaking, a firm has increasing returns to scale if doubling all inputs leads to output increasing by more than a factor of two. Decreasing returns to scale is when doubling all of a firm’s inputs, while likely increasing output, increases output by less than a factor of two. Whether returns to scale are increasing or decreasing often depends on how much room for increased specialization a firm has. Do you have experience, as either an employee or a customer, with a firm that as it grew seemed to experience either increasing or decreasing returns to scale? Why do you suspect this was the case?
