Homework SourseA shoe company has developed the production function of Q80
A shoe company has developed the production function of Q=80 L^(0.5) K^(0.6) where L represents labor and K represents capital. If L is increased by 2% with K unchanged, what is the resulting percentage change in output? Describe the nature of returns to scale for this production function.
Solution
Q=80 L^(0.5) K^(0.6)
now, L\' = 1.02L
Q\'=80 (1.02L)^(0.5) K^(0.6)
= 1.040Q
increase = 1.040 - 1 = 0.040
So percentage increase in Q is 4%
