HN Suppose 12 1097 100and 3 Consider the production function

HN). Suppose 12, 10,9,7) 100and 3. Consider the production function- 2PL (24,20, 18,14)-180. Does the production function have the property of constant returns to scale? Why or why not? 4 How does the phenomenon of diminishing returns to capital explain the catch-up effectr?

Solution

3) No because constant return to scale prevail when we double all the input then output should also double.

Thus in above function when all input doubles then output increases from 100 to 180 which is less than doubing of output.

Thus there is decreasing return to scale.

4) Diminishing return to capital means when capital increases, the marginal product derieves from each successive capital keeps on decreasing.

Thus rich countries has higher level of capital due to which they get less return compared to poor coubtries/economies and thus the gao between two countries decreases leading to catching up effect.