Among the assumptions made about the production function Y = A • (K,L) is:
A)diminishing marginal product of labour.
B)constant returns to scale.
C)diminishing marginal product of capital.
D)all of the above.

Question

Quizplus · Accepted Answer

All three assumptions are commonly made about the production function Y = A • (K,L):
- Diminishing marginal product of labour: Holding the amount of capital constant, the marginal product of labour declines as more labour is hired. This reflects the idea that at some point, adding more labour to a fixed amount of capital leads to diminishing returns to labour. 
- Diminishing marginal product of capital: Holding the amount of labour constant, the marginal product of capital declines as more capital is used. This reflects the idea that at some point, adding more capital to a fixed amount of labour leads to diminishing returns to capital.
- Constant returns to scale: If all inputs are increased by the same proportion, the output will increase by exactly that proportion as well. In other words, the production function exhibits constant returns to scale.

Among the Assumptions Made About the Production Function Y =