Question

26. If the sum of the exponents of a Cobb-Douglas production function is equal to 1.2, the production function exhibits: a) increasing average costs b) constant returns to scale. c) increasing returns to scale. d) declining productivity. e) none of the above 27. Dana, who is a trained yoga instructor, spends 4 hours on Monday baking and packing 10 boxes of cookies. She sells the cookies for $10 a box. Given that she can also teach yoga for $80 an hour, what is her opportunity cost of baking cookies? a) $420 b) $100 c) $220 d) $320 e) $800

Answer 1

Ans) 1) The sum of exponents of cobb Douglas production function tells about the returns to scale.

If it is equal to 1, the there is constant returns to scale.

If it is greater than 1, then there is increasing returns to scale.

If it is less than 1, then there is decreasing returns to scale.

Option c.

2) Opportunity cost is the cost of something that must be given up to get something else.

Here Dana is forgoing 4hrs of earning from teaching yoga, which is equal to 4×$80=$320. So, opportunity cost of baking and packaging is $320.

Option d.