As an economic consultant, you visit a production plant (a factory). During your visit, you explain...

 

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As an economic consultant, you visit a production plant (a factory). During your visit, you explain the concept of returns to scale to the manager of the factory. The manager responds as follows: "If we would double all our input then our production would also be doubled. But our revenues would not be doubled. That is because, doubling output would require decreasing our price to sell all these extra products. So our technology has decreasing returns to scale." a) Why is the manager wrong? Explain. b) What is the actual returns to scale in this production facility? Explain. 2) Suppose that: In Y = 2 ln K + In L. Find Y = F(K, L). Show all your steps and the mathematical rules that you use. 3) Suppose that: Y = 20K¹/2 L¹/3 Express In Y in terms of ln K and In L. Show all your steps and the mathematical rules As an economic consultant, you visit a production plant (a factory). During your visit, you explain the concept of returns to scale to the manager of the factory. The manager responds as follows: "If we would double all our input then our production would also be doubled. But our revenues would not be doubled. That is because, doubling output would require decreasing our price to sell all these extra products. So our technology has decreasing returns to scale." a) Why is the manager wrong? Explain. b) What is the actual returns to scale in this production facility? Explain. 2) Suppose that: In Y = 2 ln K + In L. Find Y = F(K, L). Show all your steps and the mathematical rules that you use. 3) Suppose that: Y = 20K¹/2 L¹/3 Express In Y in terms of ln K and In L. Show all your steps and the mathematical rules

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SOLUTION a The managers statement is incorrect because it confuses economies of scale with the law o... View the full answer