According to the chief engineer at the Zodiac Company, Q = AL? K? , where Q is t

Question

According to the chief engineer at the Zodiac Company, Q = AL? K? , where Q is the output rate, L is the rate of labor input, and K is the rate of capital input. Statistical analysis indicates that ? = 0.8 and ? = 0.3. The firm's owner claims the plant has increasing returns to scale.
a. Is the owner correct? Yes
b. If ? were 0.2 rather than 0.3, would she be correct? No
c. Does output per unit of labor depend only on ? and ?? Why or why not? no because it doesnot output per unit of labor depend only on a and

Explanation / Answer

a. the owner is correct. since the ?=.8 and ??=.3 when you add them up it is 1.1. this means there are increasing returns to scale. b. if it were .2 rather than .3 , when they were added it would equal 1, this means constant returns to scale. so the owner would not be correct in assuming increasing returns to scale c. output per unit of labor does not only depend on the coefficients. it also depends on the constant A .

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