Returns to Scale and the Ray Average Cost

Abstract

It is shown that a standard definition of the locally increasing returns to scale at a cost efficient input-output vector constitutes neither sufficient nor necessary condition for the ray average cost to decrease in a neighborhood of the current scale of outputs at the given input prices. And then the most general necessary and sufficient conditions are derived for the ray average cost globally to increase, remain constant or decrease for any given input prices as the level of outputs produced increases proportionlly.