Let the production function be q = AL^aK^b. The function exhibits constant returns to scale if A)a + b = 1. B)a + b 1. C)a + b

Question

Let the production function be q = AL^aK^b. The function exhibits constant returns to scale if A)a + b = 1. B)a + b > 1. C)a + b < 1. D)Cannot be determined with the information given.

Quizplus · Accepted Answer

A production function exhibits constant returns to scale if, when all inputs are scaled by a constant factor, output is scaled by the same factor. In the given function, scaling all inputs by a factor λ (where λ > 0) would result in the output being scaled by λ^(a+b). Therefore, for the function to exhibit constant returns to scale, the sum of the exponents (a + b) must equal 1, indicating that output scales linearly with input.

Let the Production Function Be Q = ALaKb

Let the Production Function Be Q = AL^aK^b