Question

With the production function production. Y=AtKt^1/3Lt^2/3, if we double ________, we have an increasing returns

1. capital

2. capital and the stock of ideas

3. capital and labor

4. capital, labor, and the stock of ideas

5. labor and the stock of ideas

Answer 1

Here Production function is = Y = A_T K^1/3 L^2/3

Here A_T is a stock of ideas , L is a labor , K is capital . Here there are two inputs i.e Labor and Capital , whereas A_T is considered to be a constant . Hence increasing return to scale is when both the inputs get doubled , then Output(Y) also get doubled . So here if the two inputs such as Capital and Labor are doubled , then Output will also get doubled and hence firm will face increasing return to scale .

Hence (C) part is a correct answer