Question

1.A production function such as Y=AKaLb is called the Cobb-Douglas (C-D) production function. Only two factors of production are assumed here: capital (K) and labor (L), with A interpreted as the level of technology. Later, it was discovered that human capital (H) is also a "neglected"factor of production, assuming that the function satisfies constant return to scales for all the factors of production that it should include (except for technology). In the correct production function, there should be:
A. a+b=1。
B. a+b>1
C. a+b<1
D. Cannot judge

2.The personal income tax is T=(I-I0)*t, where I0>0 is the income deduction and I is personal income, both measured in nominal terms. t is the tax rate. Assuming that I0, t does not change
over time, when inflation occurs, it is usually:
A． The nominal tax burden on individuals increases while the real tax burden remains unchanged.
B． Both the nominal and the real tax burdens increase.
C． The nominal tax burden remains unchanged and the real tax burden increases.
D． Both the nominal and the real tax burden remains unchanged.

Answer 1

Answer to the question no. 1:

Option A: a+b=1.

Explnation: The CD production function is written as:

If the a+b=1, then we say that the production function exhibites constant returns to scale. Because, given this situation, if the inputs labour and capital increase T times, then the Quantity will increase also by T times.

On the other hand, If the a+b>1, then we say that the production function exhibites increasing returns to scale. And, if the a+b<1, then we say that the production function exhibites decreasing returns to scale.

Answer to the question no. 2:

Option C: The nominal tax burden remains unchanged and the real tax burden increases.

Explnation: Inflation increases the price of the product. But, keeping the tax payment and income as constant, the real income is unchanged. So, this lead a real burden of tax on the individual bt the nominal burden remain same. Take a example, suppose person A is earning $100 per month, and he was paying $10 as tax. So, he has $90 as disposable income. Say the price is $10 per unit of product. He he was able to buy 9 units of certain product.

After inflation, say the price of the product has gone up to $15 per unit. So, given the same disposable income, he's now able to buy 6 units of product which is less than the earlier. Thus the nominal burden of tax is same as $10. How, ever the real burden of tax has gone up, since he's now able to buy less of good than before.

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