Consider the aggregate production function Y = F(K,L).If the inputs K and L are increased by 5% each,and the production function displays constant returns to scale,then total output will increase by ________%.

Question

Quizplus · Accepted Answer

Since the production function displays constant returns to scale, increasing both inputs K and L by 5% results in a 5% increase in total input (since 1.05K x 1.05L = 1.1025KL), and this results in a 5% increase in total output (Y = F(1.05K, 1.05L) = F(K,L)*1.05, where F(K,L)*1.05 represents a 5% increase in total output). Therefore, the answer is C) 5.

Consider the Aggregate Production Function Y = F(K,L)