Question

The production function Q = 20K0.75L0.25 exhibits

A decreasing returns to scale.

B constant returns to scale.

C increasing returns to scale.

D increasing, then diminishing returns to scale.

E negative returns to scale.

Answer 1

The production function is as follows -

Q = 20K0.75 L0.25

Output elasticity of capital = 0.75

Output elasticity of labor = 0.25

When the sum of output elasticity of capital and output elasticity of labor is equal to one then the production function exhibits constant return to scale.

When the sum of output elasticity of capital and output elasticity of labor is greater than one then the production function exhibits increasing return to scale.

When the sum of output elasticity of capital and output elasticity of labor is less than one then the production function exhibits decreasing return to scale.

Output elasticity of capital + Output elasticity of labor = 0.75 + 0.25 = 1

In the given case, the sum of output elasticity of capital and output elasticity of labor is equal to one.

Thus,

The production function exhibits constant returns to scale.

Hence, the correct answer is the option (B).