Question

Consider the smoothie example given in class: Write down the production function of Tutti Frutti Smoothie example given in class. Make sure that all ingredients are expressed in Oz. Identify the returns to scale of this production function. Is it decreasing, increasing, or constant returns to scale?

Answer 1

Answer:

Production Function : TFSq = f { ingredient 1 ...... ing. i }

Increasing/ Constant/  Increasing Returns to Scale :

Output change > / = / < Input change respectively

Explanation:

Production Function is the relationship between production inputs & outputs, given technology. It denotes the maximum output that can be generated with given inputs.

Tutti Frutti Smoothie [TFS] quantity = Function of {Ingredient1.....ingredient i}

Returns to Scale represents change in output when all inputs change in same proportion.

• Constant Returns to Scale [CRS] : Output Change = All inputs change
• Increasing Returns to Scale [IRS] : Output Change > All inputs change
• Negative Returns to Scale [NRS] : Output Change < All inputs change

When all inputs (ingredients) change by same proportion i.e get twice 2X :- If output of Tutti Frutti Smoothie increases by > 2X  i.e 3X - IRS.  If it increases equal ie 2X - CRS. If it increases lesser i.e 1.5X - CRS.