Homer's boat manufacturing plant production function is y(K, L) =

where K is the number of hydraulic lifts and L is the number of labor hours he employs. Does this production function exhibit increasing, decreasing or constant returns to scale? At the moment, Homer uses 20,000 labor hours and 50 hydraulic lifts. Suppose that Homer can use any amount of either input without affecting the market costs of the inputs. If Homer increased his use of labor hours and hydraulic lifts by 10%, how much would his production increase? Increasing the use of both inputs by 10% will result in Homer's costs increasing by exactly 10%. If Homer increases his use of all inputs by 10%, what will increase more, his production or his costs? Given that Homer can sell as many boats as he produces for $75,000, does his profits go up by 10% with a 10% increase in input use?

Question

Homer's boat manufacturing plant production function is y(K, L) =  
  
where K is the number of hydraulic lifts and L is the number of labor hours he employs. Does this production function exhibit increasing, decreasing or constant returns to scale? At the moment, Homer uses 20,000 labor hours and 50 hydraulic lifts. Suppose that Homer can use any amount of either input without affecting the market costs of the inputs. If Homer increased his use of labor hours and hydraulic lifts by 10%, how much would his production increase? Increasing the use of both inputs by 10% will result in Homer's costs increasing by exactly 10%. If Homer increases his use of all inputs by 10%, what will increase more, his production or his costs? Given that Homer can sell as many boats as he produces for $75,000, does his profits go up by 10% with a 10% increase in input use?

Quizplus · Accepted Answer

The Answer of Homer's boat manufacturing plant production function is y(K, L) =  
  
where K is the number of hydraulic lifts and L is the number of labor hours he employs. Does this production function exhibit increasing, decreasing or constant returns to scale? At the moment, Homer uses 20,000 labor hours and 50 hydraulic lifts. Suppose that Homer can use any amount of either input without affecting the market costs of the inputs. If Homer increased his use of labor hours and hydraulic lifts by 10%, how much would his production increase? Increasing the use of both inputs by 10% will result in Homer's costs increasing by exactly 10%. If Homer increases his use of all inputs by 10%, what will increase more, his production or his costs? Given that Homer can sell as many boats as he produces for $75,000, does his profits go up by 10% with a 10% increase in input use?

Homer's Boat Manufacturing Plant Production Function Is Y(K, L) =