Suppose the production function is given by where Yis output

Suppose the production function is given by where Yis output, K is capital, and N is the number of workers. What is the impact on output if both the level of capital and the number of workers double? If the levels of both capital and labor double, the production function becomes: This results in output increasing by exactly double , meaning in this case, there are constant returns to scale . Which of the following is true regarding the functional form of the production function shown above? OA. It exhibits decreasing returns to capital and increasing returns to labor. O B. It exhibits increasing returns to both capital and labor. O C. It exhibits decreasing returns to both capital and labor. D. It exhibits decreasing returns to capital and constant returns to labor.

Solution

F(2k,2L)=2f(K,L)

F(2K,2L)=Y=(2K)^1/2(2L)^1/2=2(K)^1/2(L)^1/2=2F(K,L)

Since all the input and output increases in same proportion which males it to be a constant return to scale.

Thus when input doubles, output also doubles.

McQ ans is C

Above Production function exhibits decreasing return to both capital and labor.