1. Suppose that output q is a function of a single input, labor (L). Describe the...

1. Suppose that output q is a function of a single input, labor (L). Describe the returns to scale associated with each of the following production functions: a. q = 3L. Answer: b. q = L3. Answer:

Solutions

Expert Solution

Returns to scale mean how much the production increases with a proportionate increase in the input level.

Decreasing returns to scale means that the output increases by a smaller amount as compared to an increase in the inputs.

Constant returns to scale mean that the output increases by the same proportion as the increase in inputs.

Increasing returns to scale means that the output increases by a larger proportion as compared to an increase in inputs.

In the case of one input (labor):

If the coefficient of labor is less than 1 then there are decreasing returns to scale.

If the coefficient of labor is equal to 1 then there are constant returns to scale.

If the coefficient of labor is more than 1 then there is increasing returns to scale.

Production function: q = 3L

Here, we can see that the coefficient of labor is "1", thus there will be constant returns to scale.

Production function: q = L³

Here, we can see that the coefficient of labor is more than 1 (which is 3 here), thus, there will be increasing returns to scale.

Rahul Sunny answered 1 year ago

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