Washington-Pacific, Inc., manufactures and sells lumber, plywood, veneer, particle board, medium-density fiberboard, and laminated beams. The company has estimated the following multiplicative production function for basic lumber products in the Pacific Northwest market using monthly production data over the past two and one-half years (30 observations):

Where

Q = output

L = labor input in worker hours

K = capital input in machine hours

E = energy input in BTUs

Each of the parameters of this model was estimated by regression analysis using monthly data over a recent three-year period. Coefficient estimation results were as follows:

= 0.9; = 0.4; = 0.4; and = 0.2

The standard error estimates for each coefficient are:

= 0.6; = 0.1; = 0.2; = 0.1

A. Estimate the effect on output of a 1 percent decline in worker hours (holding K and E constant).

B. Estimate the effect on output of a 5 percent reduction in machine hours availability accompanied by a 5 percent decline in energy input (holding L constant).

C. Estimate the returns to scale for this production system.

Transcribed Image Text:

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