Question

If a Production Function is given as Q(x,y) = Axay, where (a + b) = 2, the function is said to display:

• A. Decreasing returns to scale
• B. Constant returns to scale
• C. Increasing returns to scale
• D. Zero returns to scale

Hint:

Look at the sum of exponents in the function.

Answer 1

The Correct Option is C

A production function displays increasing returns to scale when the sum of the exponents of the inputs is greater than 1. This means that when all inputs are increased by a constant factor, the output increases by a larger factor. Given that Q(x, y) = Ax^ay^b, and we know a + b = 2, which is greater than 1, this indicates increasing returns to scale.

In other words, doubling the inputs will lead to more than double the output. Thus, the correct answer is (c) Increasing returns to scale.