MGEB02H3 Midterm: ECMB02 Term Test 2 2010 Fall Solutions

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Instructions: this is a closed book test, only calculator is allowed. Question-1 [30 points] answer the following short questions: [5 points] based on the following figure comment on returns to scale and marginal return of labor. Returns to scale: increasing returns to scale because doubling the output reuires les than doubling the inputs. Marginal return of labor: mpl is diminishing because if we keep capital constant (say at 2). Alternatively if we keep k=2 and add to the labour he slope of the isoquant declines implying that as more labor is employed, more labor is needed to substitute for the same amount of capital. 23 q: [5 points] a firms total cost function is given by the equation: Find the cost-output elasticity of this firm and explain whether the firm"s production is characterized by increasing returns to scale, decreasing returns to scale, or constant returns to scale.

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