A Farmer Uses M Units of Machinery and L Hours

question 11

Multiple Choice

A farmer uses M units of machinery and L hours of labor to produce C tons of corn, with the following production function C = L^0.5M^0.75. This production function exhibits

• A) decreasing returns to scale for all output levels
• B) constant returns to scale for all output levels
• C) increasing returns to scale for all output levels
• D) no clear pattern of returns to scale

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Definitions:

Profitability Index Rule

A capital budgeting technique used to decide whether to invest in a project, calculated as the present value of future cash flows divided by the initial investment cost.

Capital Budgeting Technique

Methods used by companies to evaluate and select investments in long-term assets based on their potential to generate cash flows in the future.

Profitability Index

A financial metric used to evaluate the desirability of an investment, calculated as the present value of future cash flows divided by the initial investment.

Payback Period

The duration required for an investment to generate cash flows sufficient to recover its initial cost.