Suppose our firm produces chartered business flights with capital (planes) and labor (pilots) in fixed proportion (i.e., one pilot for each plane). The expansion path for this business will:
A) increase at a decreasing rate because we will substitute capital for labor as the business grow.
B) follow the 45-degree line from the origin.
C) not be defined.
D) be a vertical line.

Question

Quizplus · Accepted Answer

Since the production function uses capital and labor in fixed proportion, the expansion path will be a straight line starting from the origin and following the 45-degree line (where the inputs are proportional to each other). As the firm expands, it will simply increase both factors in the same proportion, leading to a linear expansion path.

Suppose Our Firm Produces Chartered Business Flights with Capital (Planes)