Question

The KM Corporation builds widgets in Washington. It combines capital (K) and labour (L) in the production function in the following way:

Q(K,L) = K1/3L1/3 Labour cost: w = $8 Capital rental cost: v = $8

What do we call this form of production function?

Answer #1

**Answer to the following
question:**

This type of production function is called as the cobb-dauglas typeof production function. But, we can see that the capital share is 1/3 and the labour share is 1/3, and the sum of them is less than 1 (i.e. 2/3). So, this is strictly not a cobb-dauglas production function. This is production function exhibits a decreasing returns to scale. Which means that is we increase the labour (L) and Capital (K) by n times, the Output will increase by lessthan the n times. It can be shown as follows:

Thus, the production function is decreasing returns to scale.

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