The economist for the ABC Truck Manufacturing Corporation has calculated a production function for the manufacture of their medium-size trucks as follows:
Q= 1.3L0.75K0.3
where Qis number of trucks produced per week, l. is number of labor hours per day, and K is the daily usage of capital investment.
a. Does the equation exhibit increasing, constant, or decreasing returns to scale? Why?
b. How many trucks will be produced perweek with the following amounts of labor and capital?
Labor Capital
100 ................................... 50
120 ................................... 60
150 ................................... 75
200 ................................... 100
300 ................................... 150
c. If capital and labor both are increased by 10 percent, what will be the percentage increase in quantity produced?
d. Assume only labor increases by 10 percent. What will be the percentage increase in production? What does this result imply about marginal product?
e. Assume only capital increases by 10 percent. What will be the percentage increase in production?
f. How would your answers change if the production function were Q = 1.3L0.7K0.3 instead? What are the implications of this production function?