Indivisibility of capital causes _________ returns to scale due to ________ in the __________ production model.

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The question asks about the effect of capital indivisibility on returns to scale within a specified production framework.
Option 1: 'increasing, excess capacity, long run' — This pairing suggests that indivisibility leads to increasing returns to scale in the long run due to excess capacity. In most production models, indivisibility (a fixed, indivisible input) creates increasing returns to scale only over a range where the fixed input is amortized by a larger output, but the long run is when all inputs are variable, so indivisibility does not persist as a driver of increasing returns in the long run. Moreover, excess capacity is typically a concern in the short run when fixed inputs limit utilization, not a sustained long-run condition. Overall, this option misplaces both the long run and the role of excess capacity.
Option 2: 'decreasing, excess capacity, long run' — Here, it claims decreasing returns to scale, which would occur if output grows at a slower rate than input expansion. Indivisibility generally does not induce decreasing returns in the long run, where inputs are fully adjustable; plus, excess capacity is a short-run phenomenon tied to fixed inputs, not a long-run constraint. This combination is inconsistent with standard production theory.
Option 3: 'increasing, excess capacity, short-run' — This option links indivisibility to increasing returns to scale arising in the short run when a fixed capital input cannot be scaled down immediately. With a fixed input and scalable variable inputs, doubling all inputs can more than double output until the fixed input becomes a bottleneck, indicating increasing returns to scale within the short-run window. Excess capacity reflects unused capacity that can be leveraged as output expands, which fits the short-run context.
Option 4: 'decreasing, limited capacity, long run' — This statement pairs decreasing returns with limited capacity in the long run. Limited capacity implies a constraint on the maximum output from fixed inputs, which is more characteristic of short-run limits rather than a long-run condition where capacity could be expanded. Moreover, decreasing returns in the long run contradict the idea that all inputs can be adjusted, undermining the typical interpretation of long-run behavior.

Indivisibility of capital causes _ returns to scale due to in the __ production model.

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