Question

A certain production process requires only two types of inputs — capital and labor. In 2006, 100 units of labor and 50 units of capital were employed, and 100 units of output were produced. In 2013, 112 units of labor and 56 units of capital were employed. If the production process displays constant returns to scale, then how many units of output were produced in 2013?

Answer 1

112 units of output

Explanation:

Constant returns to scale means that an increase in inputs (capital and labor) cause the same proportional increase in output. From 2006 to 2013 labor grows from 100 to 112, in percentage that is 100*(112 -100)/100 = 12%. Capital grows from 50 to 56, in percentage that is 100*(56 -50)/50 = 12%. In consequence, output had to grow from 100 to 112, so that, an increment of 12% was made.