For this question,assume that there are decreasing returns to capital,decreasing returns to labor,and constant returns to scale.Now suppose that both capital and labor decrease by 5%.Given this information,we know that output (Y)will
A)not change.
B)decrease by less than 5%.
C)decrease by 5%.
D)decrease by more than 5% but less than 10%.
E) none of the above

Question

Quizplus · Accepted Answer

Since the production function exhibits decreasing returns to capital and labor, less input of both factors would lead to a decrease in output. Furthermore, since the production function exhibits constant returns to scale, decreasing both inputs by the same percentage would lead to an equal percentage decrease in output. Therefore, output would decrease by 5%.

For This Question,assume That There Are Decreasing Returns to Capital,decreasing