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Analyzing given production function

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Assume Firm Y's production function is given by the following Cobb Douglas equation

Q = 0.5 x L^0.6 x K^0.5

where L denotes labor and K denotes capital.

The production function exhibits (increasing/decreasing/constant) returns to scale.
If labor hours increase by 10%, what is the percentage change in output (provide a numerical answer) ?
If capital decreases by 10%, what is the percentage change in output (provide a numerical answer) ?
If the number of labor hours increases by 10% and the number of hours of capital used decreases by 10%, what is the percentage change in output ?

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Solution Summary

Solution analyzes the given production function and predicts the changes in output resulting from changes in input values.

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The production function exhibits (increasing/decreasing/constant) returns to scale.
Sum of exponents of L and K=0.6+0.5=1.1
Sum of exponents is greater than 1, we can say that production function exhibits increasing returns to scale.

If labor hours increase by 10%, what is the percentage change in output (provide a ...

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  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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