ECO204_2008_Test_2_solutions

ECO204_2008_Test_2_solutions

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Unformatted text preview: caled up by . In lectures and HWs (see HW 5 for instance) we've used = 2. First, the output with L, K and M is: Initial q = f(L, K, M) = L K M. Next, the output with twice the L, K and M is: New q = f(2L, 2K, 2M) = (2L) (2K) (2M) New q = 2 2 2 L K M New q = 2 + + L K M New q = 2 + + (initial q) The new output (with all inputs doubled) will be double the initial output when + + = 1. 4 ECO 204, 2008-2009, Test 2 Solutions This test is copyright material and may not be used for commercial purposes without prior permission (b) (5 points) For what values of , and will this company have decreasing returns with respect to materials? Show your calculations below. Answer: Explanation: If the company is to have decreasing returns with respect to materials, it means that holding labor and capital fixed when materials are doubled output less than doubles. This will happen when < 1 regardless of and . To see this formally, the initial output is q = f(L, K, M) = L K M. Suppose we double materials, holding capital and labor constant...
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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- Toronto.

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