Question

Consider two goods, x and y, each produced using two inputs, labor l and capital k. Which of the following statements is correct?

	a.	If production functions exhibit diminishing returns to scale, the production possibility frontier will be concave.
	b.	If inputs are homogeneous and production functions exhibit constant returns to scale, the production possibility frontier will be concave if goods x and y use inputs in different proportions.
	c.	If inputs are homogeneous and production functions exhibit constant returns to scale, the production possibility frontier will be a straight line if goods x and y use inputs in the same proportions.
	d.	All of the above.

Answer 1

The correct answer is: d)

Reason: option a) is correct as with diminishing returns to scale like in case of any Cobb-Douglas production function, the production possibility frontier will be concave.

option b) is correct as with Cobb-Douglas production function with the exponent sum equal to 1, the production possibility frontier will be concave.

option c) is correct as with Leontiff or L-shaped production function, the production possibility frontier will be a straight line.

Thanks!