Let the production function be q = ALᵃKᵇ.Returns to scale are equal to

Question

Quizplus · Accepted Answer

Returns to scale refer to the effect of increasing all inputs of production by the same proportion on the output. In this case, if we multiply both factors L and K by a factor λ, the new production function becomes q = A(λL)^a(λK)^b = λ^(a+b)AL^aK^b. We can see that the output will increase by λ^(a+b) times. Therefore, returns to scale are equal to a+b.

Let the Production Function Be Q = ALᵃKᵇ