Assume Firm Y\'s production function is given by the following Cobb Douglas equa

Question

Assume Firm Y's production function is given by the following Cobb Douglas equation:

Q = 0.5 x L0.6 x K0.5

where L denotes labor and K denotes capital.

a. Does the production function exhibit increasing, decreasing or constant returns to scale? Explain.

b. If labor hours increase by 10%, what is the percentage change in output? Explain.

c. If capital decreases by 10%, what is the percentage change in output? Explain.

d. If the number of labor hours increases by 10% and the number of hours of capital used decreases by 10%, what is the percentage change in output?

Explanation / Answer

a)increasing,as output is proportional to labour and capital.So,it exhibits increasing return to scale. b)as it is directly proportional,it also increases by 10% c)as it id directly proportional,it also decreases by 10% d)as both are proportional ,1.1*0.9=0.99,it decreases by 1%

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