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Decreasing

Decreasing employee stock options increases costs without improving productivity. This reduces funds available for merit-based pay. The document then provides examples of production functions exhibiting constant, increasing, or decreasing returns to scale based on changes in inputs and outputs. It analyzes functions A through E and determines the returns to scale for each. The document then discusses Café-Nervosa.com, a growing coffee business, and its president Frasier Crane reviewing the sales force compensation plan which currently pays experienced staff based on years of service and past contributions.

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164 views3 pages

Decreasing

Decreasing employee stock options increases costs without improving productivity. This reduces funds available for merit-based pay. The document then provides examples of production functions exhibiting constant, increasing, or decreasing returns to scale based on changes in inputs and outputs. It analyzes functions A through E and determines the returns to scale for each. The document then discusses Café-Nervosa.com, a growing coffee business, and its president Frasier Crane reviewing the sales force compensation plan which currently pays experienced staff based on years of service and past contributions.

Uploaded by

teshome
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Decreasing.

A rising prevalence of uniform employee stock options increases the costs of


employment with no offsetting gain in worker productivity. This reduces the pool of funds
available for merit-based pay.
P7.4Returns to Scale. Determine whether the following production functions exhibit constant,
increasing, or decreasing returns to scale.
A.Q = 0.5X + 2Y + 40Z B.Q = 3L + 10K + 500 C.Q = 4A + 6B + 8AB D.Q = 7L2+ 5LK +
2K2E.Q = 10L0.5K0.3
P7.4 SOLUTIONA.Initially, let X = Y = Z = 100, so output is: Q = 0.5(100) + 2(100) + 40(100)
= 4,250 Increasing all inputs by an arbitrary percentage, say 2 percent, leads to: Q = 0.5(102) +
2(102) + 40(102) = 4,335 Because a 2 percent increase in all inputs results in a 2 percent increase
in output (Q2/Q1= 4,335/4,250 = 1.02), the output elasticity is 1 and the production system
exhibits constant returns to scale. B.Initially, let L = K = 100, so output is: Q = 3(100) + 10(100)
+ 500 = 1,800 Increasing both inputs by an arbitrary percentage, say 3 percent, leads to: Q =
3(103) + 10(103) + 500 = 1,839 Because a 3 percent increase in both inputs results in a 2.2
percent increase in output (Q2/Q1= 1,839/1,800 = 1.022), the output elasticity is less than 1 and
the production system exhibits diminishing returns to scale.
Initially, let A = B = 100, so output is: Q = 4(100) + 6(100) + 8(100)(100) = 81,000 Increasing
both inputs by an arbitrary percentage, say, 1 percent, leads to: Q = 4(101) + 6(101) + 8(101)
(101) = 82,618 Because a 1 percent increase in both inputs results in a 2 percent increase in
output (Q2/Q1= 82,618/81,000 = 1.02), the output elasticity is greater than 1 and the production
system exhibits increasing returns to scale. D.Initially, let L = K = 100, so output is: Q = 7(1002)
+ 5(100)(100) + 2(1002) = 140,000 Increasing both inputs by an arbitrary percentage, say, 2
percent, leads to: Q = 7(1022) + 5(102)(102) + 2(1022) = 145,656 Because a 2 percent increase
in both inputs results in a 4 percent increase in output (Q2/Q1= 145,656/140,000 = 1.04), the
output elasticity is greater than 1 and the production system exhibits increasing returns to scale.
E.Initially, let L = K = 100, so output is: Q = 10(1000.5)(1000.3) = 398 Increasing both inputs by
an arbitrary percentage, say, 4 percent, leads to: Q = 10(1040.5)(1040.3) = 411 Because a 4
percent increase in both inputs results in a 3.3 percent increase in output (Q2/Q1= 411/398 =
1.033), the output elasticity is less than 1 and the production system exhibits decreasing returns to
scale. P7.5Optimal Compensation Policy. Café-Nervosa.com, based in Seattle, Washington, is a
rapidly growing family business that offers a line of distinctive coffee products to local and
regional coffee shops. Assume founder and president Frasier Crane is reviewing the company's
sales force compensation plan. Currently, the company pays its three experienced sales staff
members a salary based on years of service, past contributions to the company, and so on. Niles
Crane, a new sales trainee and brother of Frasier Crane,

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