Question

Consider a firm which produces a single output using two inputs according to the following production function: y - min{2K, L}, where y is the firms output, K is machinery (measured in machine-hours) and L is labor supply (measured in person-hours). Let r be the cost of one machine-hour and let w be the wage rate (i.e. the cost of one person-hour). Does the firms technology exhibit increasing returns to scale? Explain!

Answer 1

The firm's technology exhibits increasing returns to scale because the output increases more than proportional to the doubling of inputs.

Step-by-step explanation:

The firm's production function is y = min{2K, L}, where y is the firm's output, K is machinery measured in machine-hours, and L is labor supply measured in person-hours. To determine whether the firm's technology exhibits increasing returns to scale, we need to consider how the output changes when all inputs are doubled.

When all inputs are doubled, the value of min{2K, L} also doubles. This means that the firm's output increases more than proportional to the doubling of inputs. Therefore, the firm's technology exhibits increasing returns to scale.