In the presence of increasing returns to scale, the price-taking assumption becomes unrealistic and market power has to be taken into account. Demonstrate this claim with a 2-input, 1-output production technology.

Instructions:

Write down a fully specified 2-input, 1-output production technology exhibiting increasing (but not decreasing) returns to scale.

Choose a set of input prices and calculate the firm's cost function. Using the cost function, prove that your production technology exhibits increasing returns to scale.