The production function feature called "constant returns to scale" means that if we: A) multiply capital by z₁ and labor by z₂, we multiply output by z₃. B) increase capital and labor by 10 percent each, we increase output by 10 percent. C) increase capital and labor by 5 percent each, we increase output by 10 percent. D) increase capital by 10 percent and increase labor by 5 percent, we increase output by 7.5 percent.

Question

Quizplus · Accepted Answer

Constant returns to scale means that output will increase proportionally to an equal increase in capital and labor inputs. Therefore, if we increase both inputs by 10 percent, output will also increase by 10 percent. Option A describes the production function feature of "homogeneous of degree one," while options C and D do not accurately represent constant returns to scale.

The Production Function Feature Called "Constant Returns to Scale" Means