Analyzing Returns to Scale of the Production Function
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Consider the production function Q=100L^.5K^.4. Suppose L=1 and K=1 so that Q=100
a. If L is increased by 1 percent, that is to L=1.01 with capital unchanged, what is the resulting percentage increase in output?
b. Describe the nature of returns to scale for this production function.
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Solution Summary
Solution discusses the nature of returns to scale for the given production functions along with step-by-step calculations.
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a. If L is increased by 1 percent, that is to L=1.01 with capital unchanged, what is the resulting percentage increase in output?
Output level for L=1 and K=1 is
Q=100*1^0.5*1^0.4=100 units
Output level for L=1.01 and K=1 ...
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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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