2. If a firm increases all of its inputs by 60 percent and its output increases by 90 percent, then you know that:
A) it is encountering diseconomies of scale.
B) it is encountering economies of scale.
C) it is encountering constant returns to scale.
D) the marginal products of all inputs are falling.
To answer this question, we need to understand the concept of economies of scale and the relationship between inputs and outputs in a firm.
Economies of scale refer to the cost advantages that a firm can achieve by increasing its scale of production. When a firm experiences economies of scale, it can produce more output while keeping the average cost of production per unit of output lower.
In this question, the firm increases all of its inputs by 60%. This means that the firm is increasing its resources, such as labor, capital, and raw materials, by 60%. On the other hand, the firm's output increases by 90%. This means that for every 60% increase in inputs, the firm is able to produce 90% more output.
Based on this information, we can conclude that the firm is experiencing economies of scale. The increase in inputs by 60% is resulting in a higher increase in output by 90%, which indicates that the firm is able to achieve cost advantages and lower its average cost of production per unit of output.
Therefore, the correct answer is B) it is encountering economies of scale.