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Others found evidence of decreasing returns to scale. The argument whereby we reach this conclusion begins with the observation that the homothetic production function underlying the standard U-shaped cost curves of economic theory can be thought of as a constant returns to scale production function, except that the isoquants on a standard isoquant map are renumbered to show first increasing, then constant, and finally decreasing returns to scale as output increases. An example is presented in Appendix B wherein a firm with constant relative risk aversion, and hence DARA, violates the LeChatelier prediction for labor demanded given a symmetric, decreasing returns to scale production function of the Cobb-Douglas form. |
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