From the profit maximizing conditions for the Cobb-Douglas production function, we find that the optimal input demands for labor and capital may be related as L = brK/(aw). Under what conditions are the expenditures on capital and labor equal?
A) Constant returns to scale
B) Increasing returns to scale
C) Decreasing returns to scale
D) a = b

Question

Quizplus · Accepted Answer

When a=b, the optimal input demand equation becomes L=LR/KR * K, where LR=aQ and KR=bQ, and Q is the quantity of output produced. This means that the expenditure on labor (LR) is proportional to the expenditure on capital (KR). Therefore, when a=b, the expenditures on capital and labor are equal.

From the Profit Maximizing Conditions for the Cobb-Douglas Production Function