Question

5. Why is it that the returns to scale may depend on the level of output?

6. You are the manager of a firm that produces apple pies. You are considering employing an additional worker, but you want to know what effect the new worker will have on production. Based on your knowledge of how your firm produces its apple pies you have the production function q = K1/2L1/2, where L represents the number of workers. Since you are contemplating making the hire very soon you know that your capital is fixed at 10. What effect will hiring an additional worker have on production?

7. If a new manufacturing machine is created which allows the shaping of metal to be done by one person rather than two people what type of technological innovation is this and why?

Answer 1

Answer 5 - The Law of returns to scale are applicable in the long run. In the long run we change scale of production. This change in scale generates economies of scale and diseconomies of scale. If output is being increased and cost is being increased also it means diseconomies of scales are being generated. Economies of scale operate when cost falls with every increasing unit of output. The law of returns to scale tells about the relation between input and output in the long run. We find increasing returns to scale if output rise more than input. Decreasing returns to scale operates when output increases less than input. Constant return to scale operates when output rise in same proportion to input.