Consider the aggregate production function Y = 3K0.6N0.3, which of the following observations is incorrect?Group of answer choicesThe production function exhibits decreasing return to capital.The production function exhibits constant returns to scale.The production function exhibits decreasing return to labour.All other observations are correct.
Question
Consider the aggregate production function Y = 3K0.6N0.3, which of the following observations is incorrect?Group of answer choicesThe production function exhibits decreasing return to capital.The production function exhibits constant returns to scale.The production function exhibits decreasing return to labour.All other observations are correct.
Solution
The aggregate production function is given by Y = 3K^0.6N^0.3.
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The production function exhibits decreasing return to capital: This statement is incorrect. The return to capital is determined by the exponent of K in the production function, which is 0.6. Since 0.6 is less than 1, this implies diminishing returns to capital, not decreasing.
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The production function exhibits constant returns to scale: This statement is correct. If we sum the exponents of K and N, we get 0.6 + 0.3 = 0.9, which is less than 1. This implies decreasing returns to scale, not constant.
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The production function exhibits decreasing return to labour: This statement is correct. The return to labour is determined by the exponent of N in the production function, which is 0.3. Since 0.3 is less than 1, this implies diminishing returns to labour.
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All other observations are correct: This statement is incorrect because the first and second statements are incorrect.
Therefore, the incorrect observations are: "The production function exhibits decreasing return to capital", "The production function exhibits constant returns to scale", and "All other observations are correct".
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