ECON 2310 Lecture Notes - Lecture 7: Diminishing Returns, Marginal Product, Technological Change

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13 Jan 2018

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Fi(cid:396)(cid:373)"s p(cid:396)odu(cid:272)tio(cid:374) te(cid:272)h(cid:374)ology: su(cid:373)(cid:373)a(cid:396)izes all of its possi(cid:271)le (cid:373)ethods fo(cid:396) p(cid:396)odu(cid:272)i(cid:374)g its output. A production method is efficient: if there is no way for the firm to produce a larger amount of output using the same amounts of inputs. Production possibilities set: contains all combinations of inputs and outputs that the firm can achieve using efficient production methods. Production function: a function of the form (output=f(inputs)) giving the amount of output a firm can produce from given amounts of inputs using efficient production methods. As long as a firm can freely dispose of any extra inputs it may have, such as by sending a worker ho(cid:373)e, it"s p(cid:396)odu(cid:272)tio(cid:374) fu(cid:374)(cid:272)tio(cid:374) (cid:272)a(cid:374)(cid:374)ot slope do(cid:449)(cid:374)(cid:449)a(cid:396)d. A variable input can be adjusted over the time period being considered, while fixed input cannot. The short run is a period of time over which one or more inputs is fixed. The long run is a period of time over which all inputs are variable.

Related Questions

A basic distinction between the long run and the short run is that:

A) If a firm produces no output in the long-run, it still incurs a loss.

B) The opportunity costs of production are lower in the short-run than in the long-run.

C) In the long-run some inputs are fixed, while in the short-run all inputs are variable.

D) In the short-run, complete adjustment of all inputs is impossible, while in the long-run all inputs can be adjusted.

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1. The slope of the total product curve measures

a. the marginal rate of technical substitution.

b. marginal product.

c. average product.

d. the maximum average product.

e. minimum product.

2. The Law of Diminishing Returns to a variable input (such as labor) assumes that

a. there is at least one fixed input.

b. all inputs are changed by the same percentage.

c. the firm is operating in the short run.

d. all inputs are held constant.

e. a and c.

3. An isoquant curve identifies

a. the maximum output possible, given a fixed budget.

b. the different combinations of goods the can be produced, given fixed amounts of inputs.

c. the different combinations of inputs that can be used to produce a fixed rate of output.

d. none of the above.

4. The ratio of total productivity to the total quantity of a variable input being used in production is

a. equal to marginal physical productivity of the input.

b. constant as employment levels of the input vary.

c. equal to average physical productivity of the input.

d. equal to the marginal rate of technical substitution.

The following table summarizes the short-run production function for your firm. Your product sells for $10 per unit, labor costs $40per unit, and the rental price of capital is $10 per unit. Complete the following table, and then answer the accompanying questions.

L K Q MPL APL APK VMPL
0 5 0
1 5 20
2 5 60
3 5 120
4 5 160
5 5 180
6 5 190
7 5 190
8 5 180
9 5 160
10 5 120
11 5 60

(a) Which inputs are fixed inputs? Which are the variable inputs?

(b) How much are your fixed costs?

(c) What is the variable cost of producing 40 units of output?

(d) How many units of the variable input should be used to maximize profits?

(e) What are your maximum profits?

(f) Over what range of variable input usage does increase marginal returns exist?

(g) Over what range of variable input usage do decrease marginal returns exist?

(h) Over what range of variable input usage do negative marginal returns exist?

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ECON 2310 Lecture Notes - Lecture 7: Diminishing Returns, Marginal Product, Technological Change

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