For each of the following productions functions, determine whether returns to scale are decreasing , constant, or increasing (show your computations):
a. Q = 3K = 2L + KL
b. Q = 20K7L5
Exercise 3
HC Petersen & WC Lewis Business Consulting LLC are contracted by the Puerto Rican Treasury Department for an economic study with respect to the efficiency of accountants and bookkeepers in the audit process of corporate and individual tax collection. The study reveals that Certified Public Accountants (CPAs)who audit corporate tax returns are paid $31,200 per year, while the annual salary of a bookkeeper, who audit individual returns are paid $18,200. The study also reveals that adding one year of CPA time to audit corporate returns results in an additional tax collection of $52,000. On the contrary, an additional bookkeeper adds $41,600 per year in additional tax revenue.
a. Suppose that the Treasury wants to maximize tax revenue that is being collected, Do you consider the present combination of COAs and bookkeepers optimal? Justify your answer based on the concepts learned in this Module and chapter of production.
b. If the present mix of CIAs and bookkeepers is not optimal, should the Treasury Office hire more CPAs and less bookkeepers or vice versa? Explain why!