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 exhibits increasing returns to scale when the sum of its input exponents exceeds 1. This means a proportional increase in all inputs yields a greater proportional increase in output. For Q(x, y) = Ax^ay^b, with a + b = 2 (which is>1), this condition is met.

In simpler terms, doubling the inputs results in more than double the output. Consequently, the correct answer is (c) Increasing returns to scale.