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Asked Oct 26, 2019
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One of the assumptions of classical theory of international trade is constant returns to scale but most production activities face decreasing returns to scale. Explain the difference between these concepts using a production function.

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Answer- One of the assumption of classical theory of international trade is constant to scale but most production activities face decreasing return scale. We are taking the Example of  cobb duglus function-

For constant return of scale -    Q(K,L) = A(L)β(K)α 

If we increase the  input with the amount "c" than production function will be-

Q(cK,cL) = A(cL)β(cK)α

Q(cK ,cL) = A(cL)β(cK)α

Q(cK,cL) = A(c)α+β(L)β(K)α

...

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