Which of the following is a source of increasing returns in the context of comparative advantage?

• A. Scarcity of resources
• B. Diminishing marginal utility
• C. Specialization and division of labor
• D. Perfect competition

Answer: (C)

Verified step by step guidance

1. Understand the concept of increasing returns: Increasing returns occur when the output increases by a greater proportion than the increase in inputs, often due to efficiencies gained in production.
2. Recall the principle of comparative advantage: It states that individuals or countries benefit by specializing in producing goods for which they have a lower opportunity cost.
3. Identify how specialization and division of labor relate to increasing returns: When workers or producers specialize in specific tasks, they become more skilled and efficient, leading to higher productivity and thus increasing returns.
4. Evaluate the other options: Scarcity of resources limits production, diminishing marginal utility relates to consumption preferences, and perfect competition is a market structure, none of which directly cause increasing returns.
5. Conclude that specialization and division of labor is the source of increasing returns in the context of comparative advantage because it enhances efficiency and productivity.