The economist for the ABC Truck Manufacturing Corporation has calculated a production function for the manufacture...

The economist for the ABC Truck Manufacturing Corporation has calculated a production function for the manufacture of their medium-size trucks as follows: Q = 1.3L0.75 K 0.3 where Q is number of trucks produced per week, L is number of labor hours per day, and K is the daily usage of capital investment.

a. Does the equation exhibit increasing, constant, or decreasing returns to scale? Why? ( 5 marks)

b. How many trucks will be produced per week with the following amounts of labor and capital?

Labor Capital

100 50

120 60

150 75

200 100

300 150

c. If capital and labor both are increased by 10 percent, what will be the percentage increase in quantity produced?

d. Assume only labor increases by 10 percent. What will be the percentage increase in production? What does this result imply about marginal product?

e. Assume only capital increases by 10 percent. What will be the percentage increase in production?

f. How would your answers change if the production function were Q = 1.3L0.7 K 0.3 instead? What are the implications of this production function? ( 5 marks)

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

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