Question

Given below are two statements:
Statement I: Proportionality relationships involve the short run production functions, of which one or more factors are fixed.
Statement II: Scale relationships involve long run production functions, of which no factors are fixed.
In the light of the above statements, choose the most appropriate answer from the options below:

• A. Both Statement I and Statement II are true
• B. Both Statement I and Statement II are false
• C. Statement I is correct but Statement II is false
• D. Statement I is incorrect but Statement II is true

Hint:

Proportions = Short run (fixed inputs exist).
Scale = Long run (all inputs are variable).
Keeping this simple distinction in mind prevents confusion.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
Production relationships are analyzed across different temporal horizons, distinguishing between changes in factor proportions and changes in the scale of production.

Step 2: Detailed Explanation:
Let us evaluate both statements:
- Statement I: In the short run, at least one factor of production is held constant while others are varied. This changes the proportion of input factors (factor-factor proportions), governed by the Law of Variable Proportions. Thus, Statement I is correct.
- Statement II: In the long run, all factors of production are variable, and none are fixed. This allows the firm to change its overall scale of operations by varying all inputs in the same proportion, governed by the Laws of Returns to Scale. Thus, Statement II is correct.
Therefore, both statements are correct.

Step 3: Final Answer:
Both statements are true, corresponding to Option (A).