Thursday, August 18, 2011

Economics returns to scale?

I have a question in a study guide that is clearly important but don't know how to approach it. It reads Diminishing returns to a single factor of production and constant returns to scale are not inconsistent. Discuss. The way I'm considering answering is by creating a cobb-douglas like Q=A(L^α)(K^β) ume that α+β=1 therefore constant returns to scale is given. If the partial derivative is taken ΔQ/ΔL=αA(L^(α-1))(K^β). This does show that if L is increased that the marginal product of labor is decreasing while constant returns to scale is satisfied? Is this a correct approach?

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