EC260 Chapter Notes - Chapter 5: Marginal Product, Diminishing Returns, Substitute Good

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6 Sep 2016

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Once managers determine the demand for the firm"s product or service, they must choose the optimal method to produce. Managers need to be as efficient as possible; efficiency requires an understanding of the production process. A production process explains how scarce resources (inputs) are used to produce a good or service (output) By efficiently using inputs, mangers will minimize the firm"s costs which will lead to the maximization of the firm"s profits. The production function is a table, a graph, or an equation showing the maximum product output achieved from any specified set of inputs. The simplest production function with two inputs, one of which is fixed can be expressed as: X1 is the variable input, labour, x2 is the fixed input, capital, and q is the output rate. The firm can change the quantity of labour it uses in the short run, but cannot change the quantity of capital it has available to use.

Related Questions

Consider a profit-maximizing firm with the following production function: f(ï¨x1,x2) = ½x1x2.

The prices of the two inputs are equal to w1= 4 and w2= ½ 2, respectively

.a) What are the returns-to-scale properties of the firmâs production technology. Prove your answer.

.b) What input combination should the firm use to produce Q units of output?

.c) What is the firm's total cost of production as a function of the amount of output, Q?

.d) What is its marginal and average cost of production?

.e) Suppose the price of the first input falls to $2. What input combination should the firm use

now to produce Q units of output? What is its total, marginal, and average cost of production?

lemoncricket14

The law of eventually diminishing marginal returns: (Points : 1)

a. states that each and every increase in the amount of the variable factor employed in the production process will yield diminishing marginal returns.
b. is a mathematical theorem that can be logically proved or disproved
c. is the rate at which one input may be substituted for another input in the production process
d. None of the above

The marginal product is defined as: (Points : 1)

a. the ratio of total output to the amount of the variable input used in producing the output
b. the incremental change in total output that can be produced by the use of one more unit of the variable input in the production process
c. the percentage change in output resulting from a given percentage change in the amount of the variable input X employed in the production process with Y
d. None of the above

The rate at which one input X may be substituted for another input Y in a production process, while total output remains constant, is: (Points : 1)

a. the slope of the isoquant curve
b. the marginal rate of technical substitution

c. equal to MPx/MPy

d. all of the above
e. none of the above

Marginal revenue product is: (Points : 1)

a. defined as the amount that an additional unit of the variable input adds to the total revenue
b. equal to the marginal factor cost of the variable factor times the marginal revenue resulting from the increase in output obtained
c. equal to the marginal product of the variable factor times the marginal product resulting from the increase in output obtained
d. a and b
e. a and c

Marginal factor cost is defined as the amount that an additional unit of the variable unit of the variable input adds to ____________. (Points : 1)

a. marginal cost
b. variable cost
c. marginal rate of technical substitution
d. total cost
e. none of the above

In the Cobb-Douglas production function Q=aL^?1.K^?2 ______________. (Points : 1)

a. the marginal product of labor (L) is equal to ?1
b. the average product of labor (L) is equal to ?2
c. if the amount of labor input (L) is increased by 1 percent, then output will increase by ?1 percent
d. a and b
e. a and c