Explore BrainMass

Explore BrainMass

    Analyzing returns from production function

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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?

    © BrainMass Inc. brainmass.com October 9, 2019, 10:08 pm ad1c9bdddf


    Solution Preview


    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 Summary

    Solution describes the steps to determining whether firm is experiencing increasing return to scale or decreasing return to scale.