The Cobb-Douglas production function F(L,K)= AL^aK^bwill exhibit decreasing returns to scale when A) A + b = 1 B) A + b 1 D) A + b = 0

Question

The Cobb-Douglas production function F(L,K)= AL^aK^bwill exhibit decreasing returns to scale when A) A + b = 1 B) A + b < 1 C) A + b > 1 D) A + b = 0

Quizplus · Accepted Answer

The Cobb-Douglas production function exhibits decreasing returns to scale when the sum of exponents (A + b) is less than 1. This is because if the inputs are increased proportionally, the output will increase by a smaller percentage. If A + b = 1, the production function exhibits constant returns to scale, and if A + b > 1, it exhibits increasing returns to scale. If A + b = 0, the production function is not valid as it would suggest that one input has zero effect on output.

The Cobb-Douglas Production Function F(L,K)= ALaKbwill Exhibit Decreasing Returns to Scale

The Cobb-Douglas Production Function F(L,K)= AL^aK^bwill Exhibit Decreasing Returns to Scale