Show whether each of the following production functions exhibit increasing, decreasing or constant returns to scale....

Show whether each of the following production functions exhibit increasing, decreasing or constant returns to scale.

Q = 0.5KL [2.5 Marks]
Q = 2K + 3L [2.5 Marks]

A firm has the following production function

Q = 2(XY) ^0.5

Where, X is maize and Y is rice. The cost of maize is K10 and the cost of rice Is K40. The firm has a budget of K80 to spend on the two goods.

Formulate the firms’ optimization problem. [5 Marks]
Compute the optimal input combination of good X and Y. [5 Marks]
What level of output is associated with the optimal input combination? [3 Marks]

What is the impact of a K1 increase in the budget?

Expert Solution

Rahul Sunny answered 8 months ago

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