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    Does Zodiac Company have increasing returns to scale?

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    According to the chief engineer at the Zodiac Company, Q=AL^a K^b, where Q is the output rate, L is the rate of labor input, and K is the rate of capital input. Statistical analysis indicates that a=0.8 and b=0.3. The firm's owner claims the plant has increasing returns to scale.

    A) Is the owner correct?
    B) If b were 0.2 rather than 0.3, would she be correct?
    c) Does output per unit of labor depend only on a and b? Why or why not?

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    Solution Summary

    This solution shows how the owner is correct using a Cobb-Douglas production function and determines the returns the plant would receive if b were 0.3 and what else output per unit of labour depends on. This solution is provided in an attached Word document.