Question

Consider a firm has a production function Q = F(L,K) = L²ᵏ².

Assume no fixed cost. What kind of return to scale (RTS) does this production
function exhibit?

Answer 1

The production function Q = F(L,K) = L²ᵏ² exhibits increasing returns to scale, where an increase in inputs leads to a more than proportionate increase in output.

Step-by-step explanation:

The production function Q = F(L,K) = L²ᵏ² exhibits increasing returns to scale. Increasing returns to scale occur when an increase in inputs leads to a more than proportionate increase in output. In this case, an increase in labor (L) and capital (K) will result in a greater increase in the quantity of output (Q).

For example, if the firm doubles both labor and capital, the output may not just double, but could increase by a larger factor. This is because the combination of labor and capital produces synergies that enhance the productivity of the firm.

Increasing returns to scale can result in cost advantages for the firm, as it can produce more output without experiencing a proportional increase in costs.