Question

Consider a production function given by Q = 5

(K⁰.² +L⁰.²) ⁵ Which statement is correct?

A. The elasticity of substitution for this production function is 0.2 and it exhibits constant return to scale
B. The elasticity of substitution for this production function is 1.25 and it exhibits a constant return to scale.
C. The elasticity of substitution increases as the number of laborers increases, and it exhibits increasing return to scale
D. The elasticity of substitution decreases as the number of laborers increases, and it exhibits a decreasing return to scale

Answer 1

The correct statement regarding equation is B. The elasticity of substitution for this production function is 1.25 and it exhibits a constant return to scale.

Step-by-step explanation:

The statement correct is B. The elasticity of substitution for this production function is 1.25 and it exhibits a constant return to scale.

The elasticity of substitution measures the responsiveness of the ratio of capital to labor in production as the ratio of their prices changes. In this case, the elasticity of substitution is 1.25, indicating a moderate substitutability between capital and labor.

The production function exhibits constant return to scale because the exponent of the sum of capital and labor in the production function is 1, meaning that a proportional increase in both capital and labor will result in a proportional increase in output.