F (L, K) = L0.2K0.7，The wage rate (price per unit of labour) is w = 2 and the capital rental rate (price per unit of capital) is r = 7.Does this production function exhibit increasing, decreasing or constant returns to scale? Explain. What is the marginal productivity of labour and the marginal productivity of capital for (L,K) = (1,1)? Would a firm (which minimises costs) use this combination of labour and capital? Explain. If your answer is yes, then what would be the quantity of production for which the company would use this combination?

Answered: F (L, K) = L0.2K0.7， The wage rate…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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F (L, K) = L0.2K0.7，

The wage rate (price per unit of labour) is w = 2 and the capital rental rate (price per unit of capital) is r = 7.

Does this production function exhibit increasing, decreasing or constant returns to scale? Explain. What is the marginal productivity of labour and the marginal productivity of capital for (L,K) = (1,1)? Would a firm (which minimises costs) use this combination of labour and capital? Explain. If your answer is yes, then what would be the quantity of production for which the company would use this combination?

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