Question

Does the production function have the property of constant returns to scale?

1.Yes, because F(L, K, H, N) remains constant.
2.No, because the sum of inputs increases without a proportional increase in output.
3.Yes, because the production function involves exponential growth.
4. No, because the production function violates the law of diminishing returns.

Answer 1

The production function has the property of constant returns to scale in a constant cost industry, characterized by an elastic supply curve and the ability to increase production without increasing input costs. Agricultural markets are typical examples of such industries, where firms can scale up their production without changes in the cost structure.

Step-by-step explanation:

The property of constant returns to scale signifies that if all inputs in a production process are increased by a certain percentage, the output will increase by the same percentage. This attribute can be illustrated by a proportional increase in output in response to a proportional scaling up of all inputs, such as labor (L), capital (K), human capital (H), and natural resources (N). In a constant cost industry, the supply curve is highly elastic, and the industry can respond to increases in demand without a corresponding increase in input prices. This is partly because there is a perfectly elastic supply of inputs, allowing firms to scale production without increasing costs.

Using agricultural markets as an example, we see that they often exhibit characteristics of constant cost industries. When demand for a product like ethanol rises and more corn is needed, many farmers can switch their production from other crops such as wheat to corn without a significant change in the cost of inputs. This adaptability, alongside the ability to maintain the same cost despite a scale of production, encapsulates the principle of constant returns to scale.

In contrast, a production function that does not demonstrate constant returns to scale might either exhibit increasing returns to scale (output increases by a greater percentage than inputs) or decreasing returns to scale (output increases by a smaller percentage than inputs). The latter is often associated with the law of diminishing returns, which states that after a certain point, the addition of more of one type of input, holding all others constant, will result in diminishing incremental output.