Suppose the production function for T-shirts can be represented as q = L0.25K0.75. Show that the production function has constant returns to scale
What will be an ideal response?
When L = L1 and K = K1, q = q1. Let L2 = m ? L1 and K2 = m ? K1 so that both L and K have increased by the same proportion. Then, q2 = (m ? L1)0.25 (m ? K1)0.75 = m0.25+0.75
L10.25 K10.75 = m ? q1. Thus, for any m, output changes by the same proportion that the inputs changed.
You might also like to view...
Harry Truman is credited with the statement, "Give me a one-armed economist," because economists are likely to say, "On the one hand, . . . on the other hand." Why do economists "waffle" more than physicists or chemists?
A newspaper article informs you that most businesses reduced production in the last quarter but also sold from their inventories during the last quarter. Based on this information GDP likely
a. increased. b. decreased. c. stayed the same. d. may have increased, decreased, or stayed the same.