Which one of the following best illustrates the concept of increasing returns to scale described in the second paragr...

Victoria on June 3, 2020

Hi @filozinni,

Happy to help!

We are looking for the answer choice which best illustrates the concept outlined in the second paragraph.

First, what is the concept of increasing returns to scale?
Warsh highlights Smith's parable of the pin factory i.e. that employees at the pin factory could be more productive if they specialized in narrow tasks as opposed to working independently (lines 8 to 10).

This parable tells us that there are increasing returns to scale i.e. the bigger the pin factory, the more specialized its workers can be, and the more pins the factory can produce (lines 20 to 25).

This is illustrated by the example of a bee colony in answer choice (B).

The bigger the colony (pin factory), the more specialized its workers can be, and the more nectar (pins) the colony (factory) will produce.

Hope this is helpful! Please let us know if you have any further questions.

filozinni on June 4, 2020

Thank you very much for the helpful explanation @Victoria!