Answer to Question #164814 in Microeconomics for Omas

Question

Richardo produces widgets, using as input labour (L) and machines (K) . His production function is given by the following equation . q = 10K^(2/3)  L^(1/2). what type of returns of scale does richardo production function exhibit? Explain?

Answer 1

The production function exhibits an increasing returns to scale.

Explanation:

Increasing returns to scale refers to a situation where the rate of change of firm's output is higher than that of inputs.

In Ricardo's case, we find the total amount of returns to scale by adding the exponents 2/3 and 1/2 to get 7/6 which is a value greater than 1.

When sum of exponents is larger than 1, we therefore say that Ricardo's firm has an increasing returns to scale.