Asked by Christopher Robin on May 27, 2024
Verified
Apu's Squishy production function is 
where K is the number of squishy machines 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, Apu uses 2 squishy machines and 4 labor hours. Suppose that Apu can use any amount of either input without affecting the market costs of the inputs. If Apu increased his use of labor hours and squishy machines by 100%, how much would his production increase? Increasing the use of both inputs by 100% will result in Apu's costs increasing by exactly 100%. If Apu increases his use of all inputs by 100%, what will increase more his production or his costs? Given that Apu can sell as many squishies as he produces for $1.00, do his profits go up or down when he increases his input use by 100%?
Returns to Scale
The speed at which production levels rise due to a corresponding rise in all contributing factors.
Labor Hours
The total hours of work put in by workers or employees during a specified period.
Market Costs
Expenses incurred by companies during the production and distribution of goods or services in the marketplace.
- Evaluate whether a production function shows increasing, steady, or reducing returns to scale.
- Evaluate the effects that changes in inputs have on the productivity levels and the subsequent financial implications for the business.
- Analyze the effects of escalated input application on an organization's manufacturing processes, cost implications, and profit margins.
Verified Answer
HM
Hunter Mullings
May 28, 2024
Final Answer :
Since 
we know the production process exhibits increasing returns to scale. Increasing input use by 100% will result in production increasing by more than 100%. Since Apu can sell as many units as he likes for $1.00, we know that Apu's revenue increases by more than 100%. Since costs go up by only 100%, Apu's profits go up by more than 100%. This can be shown as follows: 
we know the production process exhibits increasing returns to scale. Increasing input use by 100% will result in production increasing by more than 100%. Since Apu can sell as many units as he likes for $1.00, we know that Apu's revenue increases by more than 100%. Since costs go up by only 100%, Apu's profits go up by more than 100%. This can be shown as follows: 
Learning Objectives
- Evaluate whether a production function shows increasing, steady, or reducing returns to scale.
- Evaluate the effects that changes in inputs have on the productivity levels and the subsequent financial implications for the business.
- Analyze the effects of escalated input application on an organization's manufacturing processes, cost implications, and profit margins.