In: Economics
Q5. Find if each Cobb-Douglas production functions below is constant return to scale, increasing return to scale, or decreasing return to scale?
Q=20K^0.8 L^0.5
Q=35K^0.8 L^0.8
Q=40K^0.3 L^0.5
Solution:
We can figure out wether the production function is
constant, increasing or decreasing by adding the value of
parameters that is
and
. Please see the detail solution in the image given
below.
So both first and second function are increasing return to scale because value addition of alpha and beta is greater than 1.
The third function is dereasing return to scale ,as the value of addition of alpha and beta is less than 1.