A firm has a production function f(x, y)= 0.70(x^0.80 + y^0.80)² whenever x 0 and y 0.When the amounts of both inputs are positive, this firm has A)increasing returns to scale if x + y 1 and decreasing returns to scale otherwise. B)increasing returns to scale. C)decreasing returns to scale. D)constant returns to scale. E)increasing returns to scale if output is less than 1 and decreasing returns to scale if output is greater than 1.

Question

A firm has a production function f(x, y)= 0.70(x^0.80 + y^0.80)² whenever x > 0 and y > 0.When the amounts of both inputs are positive, this firm has A)increasing returns to scale if x + y >1 and decreasing returns to scale otherwise. B)increasing returns to scale. C)decreasing returns to scale. D)constant returns to scale. E)increasing returns to scale if output is less than 1 and decreasing returns to scale if output is greater than 1.

Quizplus · Accepted Answer

The production function exhibits increasing returns to scale because the sum of the exponents on x and y (0.8 + 0.8 = 1.6) is greater than 1, indicating that a proportional increase in inputs will lead to a more than proportional increase in output.

A Firm Has a Production Function F(x, Y)= 0