Assume the production function is represented by Y = F (K, AN). Given this production function and the constant returns to scale assumption, output will increase by 7% when which of the following occurs?
A) K and AN increase by 7%.
B) N or A increase by 7%.
C) K and A increase by 7%.
D) N and A increase by 7%.
E) K or AN increase by 7%.

Question

Quizplus · Accepted Answer

Under the constant returns to scale assumption, if all inputs (in this case, capital K and effective labor AN) are increased by the same percentage, output Y will increase by that percentage. Therefore, if K and AN both increase by 7%, output will increase by 7%.

Assume the Production Function Is Represented by Y = F