In a Volatility Smile Diagram

question 1

Short Answer

In a volatility smile diagram:
i) What is plotted on the horizontal axis? _ _ _ _ _ _
ii) What is plotted on the vertical axis? _ _ _ _ _ _

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Definitions:

Diminishing Marginal Returns

The principle that as additional units of a factor of production are added, the increase in output will eventually decrease, holding other factors constant.

Constant Returns to Scale

A situation where increasing all inputs by a certain factor results in output increasing by the same factor, indicating proportionate scalability of production.

Increasing Returns to Scale

Occurs when an increase in all inputs by a certain percentage causes a more than proportional increase in output.

Decreasing Returns to Scale

Decreasing returns to scale occur when an increase in all inputs leads to a less than proportional increase in output, showing that the firm becomes less efficient as it scales up production.