Question

Assume a Cobb-Douglas production function of the form: 10L023 K043 What type of returns to scale does this production function exhibit? In this instance, r This production function exhibits returns to scale equal(Enter a numearic response using a real number rounded to two decimal places) a numenic O A. increasing returns to scale. O B. constant returns to scale. ⓔ C. initially decreasing but then constant returns to scale O D. decreasing retums to scale O E. iniially constant but then decreasing returns to scale.

Answer 1

q = 10L^0.23K^0.43

To find out the returns to scale, of this production function

First we multiply K an L by a constant t, and then we find out returns to scale by the power of this constant t.

q( K,L) = 10(tL)^0.23 (tK)^0.43

q(K,L) = 10*t^{0.23 +0.43} L^0.23 K^0.43

q(K,L) = t^0.66 * 10L^0.23K^0.43

q(K,L) = t^0.66 *q(K,L)

as the power of t is less than 1, the returns to the scale is decreasing.

Ans is D) Decreasing returns to scale.