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    Production Function and Cobb Douglas Equation

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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.

    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?

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    Solution Preview

    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 ...

    Solution Summary

    This solution analyzes the given production function and predicts the effect of changes in input values on output level.

    $2.49

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