Question

Monopoly caused by economies of scales is called:

Answers:	a) government monopoly.
	b) unregulated monopoly
	c) bilateral monopoly.
	d) natual monopoly.

Production function, Q = 10L + 5K+10L^0.5K^0.6 is subject to:

Answers:	a) increasing returns to scale.
	b) decreasing returns to scale.
	c) constant returns to scale.
	d) economies of scope.

Answer 1

1. d) natural monopoly.
(A natural monopoly has downward sloping average cost curve which represents economies of scale so monopoly caused by economies of scale is called natural monopoly.)

2. a) increasing returns to scale
(Q = 10L + 5K+10L^0.5K^0.6
Let L = tL and K = tK where t > 1
So, Q = 10(tL) + 5(tK) +10(tL)^0.5(tK)^0.6 = t(10L + 5K) + t^0.5+0.610L^0.5K^0.6 = t(10L + 5K) + t^1.110L^0.5K^0.6
So, there are increasing returns to scale as t^1.110L^0.5K^0.6​​​​​​​ > 10L^0.5K^0.6​​​​​​​)