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)the reduction in Y will be more than 5% but less than 10%
E)none of the above

Question

Quizplus · Accepted Answer

Since there are decreasing returns to capital and labor, a reduction in both factors will lead to a proportionate reduction in output. Also, constant returns to scale imply that the percentage change in output is equal to the percentage changes in capital and labor. Therefore, a 5% reduction in both capital and labor will lead to a 5% reduction in output (Y). Hence, the answer is C.

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