suppose that a firm\'s production function is given by the following relationshi

Question

suppose that a firm's production function is given by the following relationship; Q = 2.5L .5squard K.5squard; where Q = output L = labor input K = capital input. a) determine the precentage increase in output if labor input is increased by 10 precent (assuming that capital input is held constant). b) determine the percentage increase in output if capital input is increased by 25 precent (assuming that labor input is held constant). c) determine the percentage increase in output if both labor and capital are increased by 20 precent.

Explanation / Answer

Q = 2.5L0.5K0.5

a). Contribution of labor is .5 It implies that 100 % increase in the labor shall lead to the 50% increase in the output. Thus, 10 % increase in the labor will increase the output by 5 % only

b). Similarly keeping the labor constant and increasing the capital by the 25 % will increase the output only by 12.5 %

c). This is the case of constant returns to scale, Hence, 20 % increase in the output shall lead to 20 % increase in the output

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.