Estimate the returns to scale for this production system

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Reference no: EM133155075

Question: Suppose the production Function of Adama metal sheet company is estimated as follows:

Q = boLb1kb2Eb3

Where
Q = output
L = labor input in worker hours
K = capital input in machine hours
E = energy input in

Each of the parameters of this model was estimated by regression analysis using monthly data over a recent 3-year period. Coefficient estimation results were as follows:

ˆb0 = 0.9; ˆb1 = 0.4; ˆb2 = 0.4; ˆb3 = 0.2

The standard error estimates for each coefficient are
ˆb0 = 0.6; ˆb1 = 0.1; ˆb2 = 0.2; ˆb3 = 0.1

a. Estimate the effect on output of a 1% decline in worker hours (holding K and E constant).

b. Estimate the effect on output of a 5% reduction in machine hours availability accompanied by a 5% decline in energy input (holding L constant).

c. Estimate the returns to scale for this production system

Reference no: EM133155075

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