A Firm Has a Production Function F(x, Y) = 1

question 18

Multiple Choice

A firm has a production function f(x, y) = 1.80(x^0.80 + y^0.80) 2 whenever x > 0 and y > 0. When the amounts of both inputs are positive, this firm has

• A) decreasing returns to scale.
• B) constant returns to scale.
• C) increasing returns to scale if x + y > 1 and decreasing returns to scale otherwise.
• D) increasing returns to scale.
• E) increasing returns to scale if output is less than 1 and decreasing returns to scale if output is greater than 1.

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Definitions:

Incremental Cost

The additional cost that is incurred if a certain business decision is made or an action is taken.

Additional Cost

Expenses or charges that may be incurred beyond the initial purchase price or cost projections.

Incremental Overhead

Additional overhead costs that arise from new activities or an increase in production beyond normal operations.

Variable Costs

Costs that vary directly with the level of production or the volume of services provided.