9781118041581

c. An input’s marginal revenue product (MRP) is the extra revenue

generated by a unit increase in the input. For input A, MRPA

(MR)(MPA).

3. The long run is an amount of time long enough to allow the firm to vary
   all of its inputs.
   a. Constant returns to scale occur if a given percentage change in all
   inputs results in an equal percentage change in output.
   b. Increasing (decreasing) returns to scale occur if a given increase in
   all inputs results in a greater (lesser) proportionate change in
   output.


4. Production functions are estimated by specifying a variety of
   mathematical forms and fitting them to production data derived from
   engineering studies, economic time series, or cross sections.

Questions and Problems

1. Does optimal use of an input (such as labor) mean maximizing average
   output (per unit of input)? Explain.


2. “One-tenth of the participants produce over one-third of the output.
   Increasing the number of participants merely reduces the average
   output.” If this statement were true, would it be consistent with the law of
   diminishing returns?


3. Consider the production function Q 10L .5L^2 24K K^2 for L and
   K in the range 0 to 10 units. Does this production function exhibit
   diminishing returns to each input? Does it exhibit decreasing returns to
   scale? Explain.


4. a. Suppose the inputs in Problem 3 can be purchased at the same price
   per unit. Will production be relatively labor intensive or capital
   intensive? Explain.
   b. Suppose input prices are PL40 and PK80 and the price of output
   is 10. Determine the optimal quantity of each input.


5. Explain the difference between diminishing returns and decreasing
   returns to scale.


6. Making dresses is a labor-intensive process. Indeed, the production
   function of a dressmaking firm is well described by the equation Q 
   L L^2 /800, where Q denotes the number of dresses per week and L is
   the number of labor hours per week. The firm’s additional cost of hiring
   an extra hour of labor is about $20 per hour (wage plus fringe benefits).
   The firm faces the fixed selling price, P $40.
   a. How much labor should the firm employ? What is its resulting output
   and profit?

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