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?
a.Let us see what is value of a+b=0.8+0.3=1.1
Since a+b>1, she is right if she says that plant is having increasing returns to scale.
b) if b=0.2 then ...
Solution describes the steps to determining whether firm is experiencing increasing return to scale or decreasing return to scale.