returns to scale

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returns to scale

the relationship between OUTPUT of a product and the quantities of FACTOR INPUTS used to produce it in the LONG RUN. Where, for example, doubling the quantity of factor inputs used results in a doubling of output then constant returns to scale’ are experienced. Where ECONOMIES OF SCALE are present, a doubling of factor inputs results in a more than proportionate increase in output. By contrast, where DISECONOMIES OF SCALE are encountered, a doubling of factor inputs results in a less than proportionate increase in output.
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It calculates the difference in technical efficiency when a firm operates under constant returns to scale (CRS) and variable returns to scale (VRS).18 The difference in both defines inefficiency in that particular DMUs operations.19
As an example of constant returns to scale, consider U.S.-Asia ocean vessel shipping.
Production technologies vary across countries and more of the phenomenon of increasing returns to scale has been observed rather than constant returns to scale. Not to mention that the uncertainties in the global markets have intensified.
Under BCC model, TE can further be decomposed into Pure Technical Efficiency (PTE), the efficiency arising out of a manager's ability to utilize resources most efficiently and get the maximum possible returns, and Scale Efficiency (SE), that is the ability to increase/decrease the scale of operation to the optimum and operate at the Constant Returns to Scale. Thus, Pure Technical Inefficiency (PTIE) also represents wastages that are devoid of Scale Inefficiency (SIE).
Their results showed that according to CCR model mean values have approximately downward trend while according to BCC model nine industries had lower unit efficiency in constant returns to scale. Technical efficiency had upward trend among provinces.
"Indeterminacy under Constant Returns to Scale in Multisector Economies." Econometrica 68 (November): 1541-48.
Furthermore, according to (Fare et al, 1994), this technology defines a production set that is closed and convex, and it exhibits constant returns to scale and strong disposability.
The advances as output model show that the average constant returns to scale and average scale efficiency of the bank increased by 7.3 percent and 8.2 percent respectively, but its variable returns to scale efficiency reduced by 0.9 percent during the post-merger period.
This paper uses a Data Envelopment Analysis (DEA) technique with constant returns to scale and variable returns to scale to estimate the technical, allocative, and economic efficiencies.
Nonetheless, the use of regression analysis on the operating expenditure and the selected cost drivers yielded a "constant returns to scale" justification.

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