ECO204_2008_Test_2_solutions

Show your calculations below answer explanation if

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Unformatted text preview: : New q = f(L, K, 2M) = L K (2M) New q = 2 L K M New q = 2 Initial q With decreasing returns in materials, when materials is doubled, output less than doubles, which happens when < 1. 5 ECO 204, 2008-2009, Test 2 Solutions This test is copyright material and may not be used for commercial purposes without prior permission Question 4 (10 points) A company uses Labor (L) and Capital (K) as inputs to produce target output q with the production function q = min(L, K) + . For what values of , and will this company have increasing returns to scale? Show your calculations below. Answer: Explanation: A production function has increasing returns to scale (RTS > 1) if: f( L, K, M) > f(L, K, M). That is, when the output with all inputs scaled up by a factor is greater than the output scaled up by . In lectures and HWs, we've used = 2. First, the initial output with L, K is: Initial q = f(L, K) = min(L, K) + Next, the output with twice the L and K is: New q = f(2L, 2K) = min(2 L, 2 K) + New q = 2 min(L, K) + We need to se...
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This note was uploaded on 05/02/2011 for the course ECO 204 taught by Professor Hussein during the Fall '08 term at University of Toronto.

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