Question

(a) Assume that the productionfunction for a firm is q=VKV. (1) Show that this function means constant returns to scale. Explain in words what constant returns to scale mean. (b) Suppose instead that the production function is q=KL. (2) Show that this function means increasing returns to scale. Explain in words what increasing returns to scale mean. (c) The measure of 'Economies of Scale' is % change in C Ec = % change in MC AC If (1) applies, it can be shown that the cost function is C=a.4, where a is a constant containing, inter alia, factor prices. This means that MC = AC = a. Calculate Ec. Interpret the result in light of returns to scale. (d) If (2) applies, it can be shown that the cost function is C=a.14, This mean that MC=a.. ta and AC=a. Ta Calculate Ec. Interpret the result in light of returns to scale.

Answer 1

0 q = IR I q (dk,d() = lik die = dikri Constant retween to scale. 2 - KL o(ka) Q = (dK, d.) = (dk) (d() = Increasing return (3) 26 mC=AC= a then it means funchasi represent Cee constant return to scale 4 Ce=1 hom to scale