Always Round Tire has a production function of Q = 300 L.75 K.5. If Always Round Tire doubles the size of its production facility-increasing L from 250 to 500 and K from 25 to 50 -what happens to the cost of production, even though we do not know the wages of labor or the price of capital?
What will be an ideal response?
This production exhibits increasing returns to scale. Doubling the scale of production will more than double the quantity of output. Costs per unit will decline because the firm takes advantage of the economies of scale.
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