1. A country’s production function depends on labor (L) and capital (K) and shows constant returns...

1. A country’s production function depends on labor (L) and capital (K) and shows constant returns to scale. When L = 140 and K = 150, output is 330. Based on this information, what is a possible value for output when L = 70 and K = 50? Briefly explain your reasoning.

2. In 1960, CPI in the United States was 29.6. In 2017, CPI in the United States was 245.1. If a pair of pants cost $35 in 2017, how much did they cost in 1960 if the price is the same, relative to cost of living, in both years?

Solutions

Expert Solution

1) Constant returns to scale occurs when increase in input lead to proportionately increase in output.

Labor (L) = 140 and Capital (K) = 150 leads to output level of 330

When L = 70 and K = 50, output must be less than 165 because labor have doubled and capital have tripled, output would be less than half of initial level.

2) CPI in 1960 = 29.6

CPI in 2017 = 245.1

Cost of pair of pant in 2017 = $35

Cost of pair of pant in 1960 must be: [CPI in 1960 / CPI in 2017] * Cost of pair of pant in 2017 = [29.6 / 245.1] * $35 = $4.23 (rounded to two decimals)

Rahul Sunny answered 1 year ago

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