| Suppose that the production function for a commodity is given by Q = 10 (LK)^0.5 where Q is the quantity of output, L is the quantity of labor, and K is the quantity of capital. ( a) Indicate whether this production function exhibits constant, increasing, or decreasing returns to scale. ( b) Does the production function exhibit diminishing returns? If so, when does the law of diminishing returns begin to operate? Could we ever get negative returns?
NOTE: P12(a): Calculate Q when L=1and K=1, and L=2 and K=2. Then compare and answer the question about the returns to scale. P12(b): Given K=1, show the change in Q if L changes from 1 to 2 and 2 to 3. Answer the question about diminishing returns. |
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