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.
1. If labor hours increase by 10%, what is the percentage change in output (provide a numerical answer)?
2. If capital decreases by 10%, what is the percentage change in output (provide a numerical answer)?
3. 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?© BrainMass Inc. brainmass.com October 25, 2018, 5:04 am ad1c9bdddf
The production function exhibits (increasing/decreasing/constant) returns to scale.
Sum of exponents of L and K=0.6+0.5=1.1
In the case of the Cobb Douglas function if sum of exponents is greater than 1, production function exhibits increasing returns to scale.
If labor hours increase by 10%, what is the percentage change in ...
This solution analyzes the given production function and predicts the effect of changes in input values on output level.
Cobb-Douglas Production Function
I am fairly new to economics with only a basic understand of the topic and because of this I am struggling to answer (and understand the explanation for the answer) a question about the Cobb Douglas production function.
Q. Under what conditions does a Cobb-Douglas production function (q=AL^(alpha)K^(beta)) exhibit decreasing, constant or increasing returns to scale?
Alongside this, can someone please breakdown for me how and why '(alpha) + (beta) > 1' would indicate increasing returns. All answers online and in the textbook have been out of my depth in terms of understanding.View Full Posting Details