Question

The following table shows how much output a firm can produce as it relates to the use of both capital K and labor L: KIL 2 40 60 75 85 90 3 4 65 85 100 110 115 70 90 105 115 120 20 40 2 3 4 75 90 100 105 65 70 Starting from K-2 and L-2, if both inputs are scaled by factor t, then O A. Ift1.5, production exhibits constant returns to scale OB. Ift 2, production exhibits increasing returns to scale ° C. If t 1.5, production exhibits increasing returns to scale O D. Ift 2, production exhibits constant returns to scale

Answer 1

- A. Is correct

When t=1.5, K and L are 3

When K and L= 2, output is 60

When K and L increase by 1.5 and are equal to 3, output is 90 which is equal to 1.5(60)= 90.

Thus % increase in input is equal to % increase in output.

This means there is constant returns to scale.

- A is correct

Marginal physical product of labor is decreasing with increase in labor. The increase in output is decreasing with increase in labor units.