Question

If output is described by the production function $Y = L^{\alpha }K^{1-\alpha }$ , then the production function has:

(a) degree of returns to scale that cannot be determined from the information given.

(b) diminishing returns to scale

(c) increasing returns to scale

(d) constant returns to scale

(e) None of the above

Answer 1

Returns to scale refers to change in output due to change in the factors of production (inputs) used in production.It is a long run concept.Here the given production function is a Cobb-Douglas production function.Cobb-Douglas production function is characterised by constant returns to scale as it is a linear homogeneous production function of degree 1.Therefore the answer is option (d).