Analyzing Given Production Functions
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Determine whether the following production functions exhibit constant, increasing, or decreasing returns to scale.
A. Q = 0.6L + 20K +10F
B. Q = 2L2 + 3LK + 5K2
C. Q = 20L0.25K0.70
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This solution depicts the required steps needed to check if the given functions exhibit increasing, decreasing or constant returns to scale. All work is clearly shown.
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A. Q = 0.6L + 20K +10F
Let L=100, K=100 and F=100 at initial point.
Q1=0.6*100+20*100+10*100=3060
Suppose all inputs are raised by 2%
i.e. L=102, K=102, F=102
Q2=0.6*102+20*102+10*102=3121.2
Percentage change in output=(Q2-Q1)/Q1=(3121.2-3060)/3060=2%
In this case, output has increased in the same proportion as that of inputs. We ...
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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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