Given a Cobb-Douglas production function estimate of Q = ...

[shofmannx20]

Given a Cobb-Douglas production function estimate of Q = 1.19L.72K.18 for a given industry, this industry would have:
 a. increasing returns to scale
  b. constant returns to scale
  c. decreasing returns to scale
  d. negative returns to scale
  e. none of the above

Question 2

Safety Training One task of Mega Manufacturing's Human Resource Department is to perform periodic safety training at Mega's various plants. HR is run as a profit center with each plant manager paying for this safety training via a transfer price. Recently, some of the plant managers have been hiring outside firms for their safety training. HR has complained to corporate that they will have to lay off staff if this continues but the plant managers reply that they are maintaining their acceptable safety record at a lower cost. What does this imply about the transfer price?

[cegalasso]

Answer to Question 1

c

Answer to Question 2

The transfer price is too high. If HR is competent at training then their marginal cost will be below an outside firm's market price. If their marginal cost exceeds the market price for a comparable service, they are not as competent as their outside competition and it is profitable for the company for plant managers to seek outside trainers.