Question

In: Economics

For each of the following production functions, determine whether it exhibits increasing, constant or decreasing returns...

For each of the following production functions, determine whether it exhibits increasing, constant or decreasing returns to scale:

a) Q = K + L

b) Q = L + L/K

c) Q = Min(2K,2L)

d) Q = (L5 )(K5)

Solutions

Expert Solution

a) Q=K+L

if we increase both K and L by proportion

then Q = K + L = (K+L) = Q

Since output increases by the same proportion as the inputs, therefore, this production function exhibits constant return to scale.

b) Q = L + L/K

if we increase both K and L by proportion

Q = L + (L/K) = (L+ L/K) = Q

This also exhibits Constant return to scale

c) Q = Min(2K, 2L)

This is a fixed proportion production function where both the inputs are used in fixed proportion. This also exhibits Constant return to scale

d) Q = (L5 , K5)

if we increase both K and L by proportion

Q = (L)5 + (K)5 = 5 (L5 , K5) = 5 Q

This implies increasing return to scale

Rahul Sunny answered 1 year ago
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