INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;

Charles van Marrewijk, 2006; 1

Constant returns to scale

Suppose 5 labour and 15 capital can produce 10 X This is the isoquant associated with point A Under constant returns to scale a proportional increase in inputs leads to a proportional increase in output Suppose we increase K and L by 40% K from 15 to 21 and L from 5 to 7 B A

21
15

Then output also increases by 40% from X = 10 to X = 14 Thus, the isoquant at point B is X = 14 X = 14
X = 10

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;

Charles van Marrewijk, 2006; 2

Constant returns to scale

Increasing the inputs at A with 40% is equivalent to increasing the length of a line from the origin through A with 40% But if A is another point on the X=10 isoquant we can use the same procedure to conclude that B must be also B on the X=14 isoquant This procedure can be repeated for any arbitrary point on the X=10 B A isoquant; here are a few A The X = 14 isoquant is a radial blow-up

X = 14
X = 10 0 L

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;

Charles van Marrewijk, 2006; 3

Constant returns to scale

21
15

Under constant returns to scale the isoquants are radial blow-ups of each other, which implies that drawing 1 isoquant gives information on all others For example, that if cost is minimized at point A for X = 10, then it is also minimized at the 40% radial blow-up of A (B) for X = 14 Thus, the slope of the isoquant at point A is the B same as at point B A

X = 14
X = 10 0 5 7 L

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;

Charles van Marrewijk, 2006; 4

Constant returns to scale

K
10=F(15,5)

If

21
A 15

X = 14 X = 10 0 5 7 L