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Analyzing returns from production function

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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

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

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Solution

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 provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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