Statement (I): The elasticity of factor substitution is formally defined as the percentage change in the capital-labour ratio divided by the percentage change in the marginal rate of technical substitution. Statement (II): \(Q = K^{0.5} L^{0.3}\) is a production function where Q = output, K = units of capital and L = units of labour. This production function shows the application of increasing returns to scale. Codes:
Statement (I) is correct while statement (II) is incorrect.
This is a two-statement question, one testing a definition from production theory and the other a returns-to-scale calculation, so each is judged separately.
Statement (I) is correct. The elasticity of factor substitution measures how easily one input can be substituted for another along an isoquant as their relative prices change. It is formally defined as the percentage change in the capital-labour ratio (K/L) divided by the percentage change in the marginal rate of technical substitution (MRTS). A high value means the factors substitute easily; a low value means they are used in nearly fixed proportions.
Statement (II) is incorrect. For a Cobb-Douglas production function \(Q = K^{a}L^{b}\), the nature of returns to scale is decided by the sum of the exponents: if \(a+b>1\) there are increasing returns, if \(a+b=1\) constant returns, and if \(a+b<1\) decreasing returns. Here \(a+b = 0.5 + 0.3 = 0.8 < 1\), so the function shows decreasing returns to scale, not increasing returns as the statement claims.
So Statement (I) is correct while Statement (II) is incorrect.
Hence the correct code is that Statement (I) is correct while Statement (II) is incorrect.
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A. Specifying objectives
B. Making choice of methods
C. Determing the perspective
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E. Collection of data and data adjustment
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(a) Investment Analysis and Decisions
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(c) Input Reward Analysis and Decisions
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Which one of the following statements is not correct ?
When P0 and P1 and Q0 and Q1 denote before and after change in the price and quantity respectively and in both the situations, total outlay remains the same, which of the following formulae give the similar value of the arc price - elasticity of demand ?
(a) \(\dfrac{Q_{0}-Q_{1}}{P_{0}-P_{1}}\times\dfrac{P_{0}+P_{1}}{Q_{0}+Q_{1}}\)
(b) \(\dfrac{Q_{0}-Q_{1}}{P_{0}-P_{1}}\times\dfrac{P_{0}}{Q_{1}}\)
(c) \(\dfrac{Q_{0}-Q_{1}}{P_{0}-P_{1}}\times\dfrac{P_{0}}{Q_{0}}\)
(d) \(\dfrac{Q_{0}-Q_{1}}{P_{0}-P_{1}}\times\dfrac{P_{1}}{Q_{1}}\)
(e) \(\dfrac{Q_{0}-Q_{1}}{P_{0}-P_{1}}\times\dfrac{P_{1}}{Q_{0}}\)
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Reasoning (R) : Isoquants will slope positively if the use of an input is increased beyond the limit set by the ridge lines.
Code :
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Important Questions from Production Function
Match List I with List II
LIST I
(Production Cost)
LIST II
(Underlying Meaning)
A.
Implicit Costs
I.
Change in the total cost per unit change in output.
B.
Marginal cost
II
Total increase in costs resulting from the implementation of a particular managerial decision.
C.
Incremental Cost
III.
Inputed value of inputs owned and used by the firm.
D.
Sunk Cost
IV.
The costs that are not affected by managerial decision.
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For the following two statements of Assertion (A) and Reasoning (R) suggest the correct code:
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Reasoning (R): Firms generally enter into production of new products with excess capacity of the plant initially.
Code:
Indicate the correct code from the following types of the long run average cost curves on which the minimum average cost of production in long run can be determined:
(i) Long run average cost curve under normal production function
(ii) Long run average cost curve under linearly homogeneous production function
(iii) Planning curve
(iv) Envelope curve
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In which one of the following concepts, a buyer is passively involved in an exchange transaction, and he accepts whatever is offered to him by a marketer?
Lowering of costs that a firm often experiences when it produces two or more products together than each alone is known as ________.
