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Tutorial_1_-_Production_Technology

# Tutorial_1_-_Production_Technology - Intermediate...

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1 Intermediate Macroeconomics Tutorial 1 – Production Technology 1. (a) What is meant by a homogeneous production function, expressed in general functional form? (b) How is the homogeneity of the production function related to returns to scale? (c) Suppose that you have a Cobb-Douglas production function of the following form: Q = 0.25K 0.24 L 0.40 D 0.10 where Q is output, K is capital stock, L is labour, and D is land. What is the interpretation of the individual exponents on K , L and D respectively? (d) What is the interpretation of the sum of these coefficients (i.e., which represents the degree of homogeneity for this function)? Is this function subject to constant, decreasing or increasing returns to scale? Explain your reasoning. 2. (a) Determine whether each of the following production functions has constant, increasing, or decreasing returns to scale: (i) = + 2 15 ( , ) F K L K L (ii) = ( , ) F K L KL (iii) = + 2 15 ( , ) F K L K L (b) How can you (graphically) represent returns to scale ( IRS, CRS, DRS ) using isoquants?

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2 3. If a 10% increase in both capital and labour causes output to increase by less
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Tutorial_1_-_Production_Technology - Intermediate...

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