Question

A firm has a production function satisfying constant returns to scale. Their cost of producing 100 units of their product is $200,000.00. What is their cost of producing 500 units?

Answer 1

Answer:

1,000,000

Explanation:

As there are constant returns to scale the cost to produce a greater output will grow following a linear fucntion thus,

if 100 units units are produced at a cost of 200,000 dolllars

then 500 units will be produced five times that amount:

200,000  x 500/100 = 200,000 x 5 = 1,000,000

The total cost for 500 units will be a million dollars

Answer 2

Answer:

Constant returns to scale is when a proportional increase in inputs such as capital and labour cause the same proportional increase in output. Constant returns to scale occurs when an increase in number of inputs leads to an equivalent increase in the output.

From the question, to determine the cost of producing 500 units;

The cost of producing 100 units = $200,000

The cost of producing 500 units = ?

= ($200,000 × 500) ÷ 100

= $100,000,000 ÷ 100

= $1,000,000

The cost of producing 500 units = $1,000,000