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
Solution Preview
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 ...
Solution Summary
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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