Question

Input/Output Help

Suppose that in order to produce a good, Y, a firm needs three inputs, capital, K, labor, L, and finally, land, W. With these a firm can produce Y- K L w° where a+b+g 1. If a firm double all inputs, what will happen to his the output? Select one a. It will double. O b. More information is needed c. It will less than double. O d. It will more than double

Answer 1

Option (d).

Y = K^aL^bW^g

If all inputs are doubled, new production becomes becomes

Y1 = (2K)^a(2L)^b(2W)^g = 2^a x 2^b x 2^g x K^aL^bW^g = 2^a x 2^b x 2^g x Y = 2^(a+b+g) x Y

Y1/Y = (2^(a+b+g) > 2, since (a + b + g) >1 [given].

[Since doubling all inputs more than doubles the output, there is increasing return to scale]