Question
David's boat manufacturing plant production function is y ( K,L ) = K^ 1 / 3 L^ 1 / 2 where K is the number
David's boat manufacturing plant production function is y(K,L) = K^1/3L^1/2 where K is the number of hydraulic lifts and L is the number of labor hours he employs. Does this production function exhibit increasing, decreasing or constant returns to scale? At the moment, David uses 20,000 labor hours and 50 hydraulic lifts. Suppose that David can use any amount of either input without affecting the market costs of the inputs. If David increased his use of labor hours and hydraulic lifts by 10%, how much would his production increase? Increasing the use of both inputs by 10% will result in David's costs increasing by exactly 10%. If David increases his use of all inputs by 10%, what will increase more, his production or his costs? Given that David can sell as many boats as he produces for $75,000, does his profits go up by 10% with a 10% increase in input use?
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