# A firm has carefully estimated its production function to be: Q = K^0.4L^ 0.6 , where Q = units...

## Question:

A firm has carefully estimated its production function to be: Q = K0.4L 0.6 , where Q = units of output, K = units of capital, and L = units of labor. If both capital and labor were increases by 10%, how much would output increase (in percentage terms)? What sort of returns to scale does the firm face? Explain.

## Returns To Scale:

The term "returns to scale" refers to the way in which a firm's output changes as its inputs change by equal percentages. If a firm increases all its inputs by the same percentage and the change in its output is less than proportional, then the firm experiences decreasing returns to scale. If the change in output is more than proportional, the firm experiences increasing returns to scale. Finally, if the change in output is proportional, the firm experiences constant returns to scale.

## Answer and Explanation: 1

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View this answer**Answer: The firm faces constant returns to scale.**

Given:

- {eq}Q = K^{0.4}L^{0.6} {/eq}

Our task here is to determine the percentage change in output...

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Chapter 3 / Lesson 71Understand the meaning of returns to scale in economics. Learn about increasing returns to scale, constant returns to scale and decreasing returns to scale.

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