Topic 4: Production Theory - Custom Scholars
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# Topic 4: Production Theory

question

The Jason Jax Company has the following long run production function: Q = aL^0.5 K^0.2 E^0.2

The Jason Jax company is facing:

Decreasing returns to scale
question
The production function for the Jason Jax Company is an example of a:
Cobb-Douglas production function
question
Does the marginal product of energy (E) in the Jason Jax production function depend upon the level capital?
Yes
question

A firm has the following production function: Q = 20L + 20K + 50

What is the scale implication of this production function?

Decreasing returns to scale
question

A firm has the following production function: Q = 30L^2 + 25K^2

What is the scale implication of this production function?

Increasing returns to scale
question

Growth in number of robots (a form of capital) will increase the marginal product of labor if the production function can be characterized as a power function (Q=aL^bK^c).

True/False?

True. Labor becomes more productive, the greater the amount of capital available.
question

The law of diminishing marginal returns is applicable primarily to the long run production function where all inputs are variable.

True/False?

False. The law of diminishing returns applies when increasing one factor of production, holding one or more other factors of production constant. In the short run, some factors of production are constant. Hence, we can view the law of diminishing returns as predominantly a short run law.
question

When marginal product is at its maximum, average product is also at its maximum.

True/False?

False. Marginal product hits its maximum before average product hits its maximum. In fact, at the maximum average product output, marginal product equals average product.
question

If the production elasticity for labor is greater than 1, then MP(L) < AP(L).

True/False?

False. When the production elasticity for labor is greater than 1, then MPL > APL.
question

We should use relatively more labor if we learn that the marginal product per dollar of labor expenditures is less than a marginal product per dollar of capital expenditures.

True/False?

False, When MPL /CL < MPK/CK, then we should use relatively more capital compared with labor.
question

If labor and capital have become more and more substitutable over time, then production isoquants have become more like right angles over time.

True/False?

False, If labor and capital have become more and more substitutable over time, then production isoquants have become more like straight lines over time.
question

The law of diminishing marginal returns states that increases in the variable input reduce the total product.

True/False?

False, increases in the variable input eventually reduce the marginal product of the input.
question

If the labor elasticity of output is 0.65, then the anticipated increase in output for a 3% increase in labor would be approximately 1.95%.

True/False?

True, the reason for the word “approximately” is that elasticities are best interpreted for very small changes in the input. Elasticities involve first derivatives that are precise only in the limit.

question
The combinations of inputs costing a constant C dollars is called:
isocot line
question
The marginal product is defined as:
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.
question
Suppose that a firm uses two inputs: capital and labor. It has selected the levels of usage of capital and labor at which MPK = 50 and MPL = 20. If the cost of labor is \$5 per unit and the cost of capital is \$10 per unit:
the firm should increase its usage of capital relative to labor.
question
Which of the following is never negative?
Average product
question
If the average product curve is rising, the marginal product curve:
Must be above the average product curve.
question
An isoquant curve shows
all the alternative combinations of two inputs that yield the same maximum total product.
question
The marginal rate of technical substitution is
the rate at which a producer is able to exchange, without affecting the quantity of output produced, a little bit of one input for a little bit of another input.
question
A negatively sloped isoquant implies
inputs with positive marginal products.
question
In the presence of a diminishing marginal rate of technical substitution between labor and capital, output can be kept unchanged only if
equal successive increases in labor go hand in hand with ever smaller sacrifices of capital.
question
A fixed input is an input
whose quantity cannot be changed in the short run.
question
The Rollee Tire Company produces tires for automobiles. In response to increased demand in the market for autos in the United States, the company is considering short-run changes that would allow it to increase production. These might include
overtime work for assembly-line employees.
question
For any commodity, the relationship between the quantities of various inputs used per period of time and the maximum quantity of the commodity that can be produced is called the
production function.
question
Production Theory

•Analogous to consumer theory

•About physical relation between inputs and outputs

•What combinations of inputs lead to specific levels of outputs?

•Good for examining implications of adjusting inputs.

•Once we understand the “how stuff is made” we can better understand supply curves and how they affect markets.

question
Factors of production

•Labor, L

•Capital, K

•Land

•Energy

•Materials

•Management

question
Production Definitions

•Fixed factors: inputs that a firm cannot cost-effectively change in the short run; e.g., buildings, machinery, land.

•Variable factors: inputs that a firm can adjust in the short run; e.g., labor, materials, management.

•Short run: period during which at least one factor is fixed

•Very short run: period during which all factors are fixed

•Long run: period during which the level (and type) of all factors can be adjusted.

•Scale: the level of fixed factors employed by a firm.

question
Returns to Inputs

•Increasing marginal product (increasing returns) from underutilized capital and opportunities for specialization

•Decreasing marginal product (decreasing return) when opportunities for better use of capital and specialization are exhausted, crowding might set in.

•Law of diminishing returns: when additional units of a variable factor are combined with other fixed factors, marginal product will decline (c.f., diminishing marginal utility).

question
Analogies for the Relation Between MP and AP

When MP > AP, then AP is RISING

When MP < AP, then AP is FALLING

IF THE MARGINAL WEIGHT ADDED TO A TEAM IS LESS THAN AVERAGE WEIGHT, THEN AVERAGE TEAM WEIGHT DECLINES

•When MP = AP, then AP is at its MAX

IF THE NEW HIRE IS JUST AS EFFICIENT AS THE AVERAGE EMPLOYEE, THEN AVERAGE PRODUCTIVITY DOES NOT CHANGE

question
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1 of 31
question

The Jason Jax Company has the following long run production function: Q = aL^0.5 K^0.2 E^0.2

The Jason Jax company is facing:

Decreasing returns to scale
question
The production function for the Jason Jax Company is an example of a:
Cobb-Douglas production function
question
Does the marginal product of energy (E) in the Jason Jax production function depend upon the level capital?
Yes
question

A firm has the following production function: Q = 20L + 20K + 50

What is the scale implication of this production function?

Decreasing returns to scale
question

A firm has the following production function: Q = 30L^2 + 25K^2

What is the scale implication of this production function?

Increasing returns to scale
question

Growth in number of robots (a form of capital) will increase the marginal product of labor if the production function can be characterized as a power function (Q=aL^bK^c).

True/False?

True. Labor becomes more productive, the greater the amount of capital available.
question

The law of diminishing marginal returns is applicable primarily to the long run production function where all inputs are variable.

True/False?

False. The law of diminishing returns applies when increasing one factor of production, holding one or more other factors of production constant. In the short run, some factors of production are constant. Hence, we can view the law of diminishing returns as predominantly a short run law.
question

When marginal product is at its maximum, average product is also at its maximum.

True/False?

False. Marginal product hits its maximum before average product hits its maximum. In fact, at the maximum average product output, marginal product equals average product.
question

If the production elasticity for labor is greater than 1, then MP(L) < AP(L).

True/False?

False. When the production elasticity for labor is greater than 1, then MPL > APL.
question

We should use relatively more labor if we learn that the marginal product per dollar of labor expenditures is less than a marginal product per dollar of capital expenditures.

True/False?

False, When MPL /CL < MPK/CK, then we should use relatively more capital compared with labor.
question

If labor and capital have become more and more substitutable over time, then production isoquants have become more like right angles over time.

True/False?

False, If labor and capital have become more and more substitutable over time, then production isoquants have become more like straight lines over time.
question

The law of diminishing marginal returns states that increases in the variable input reduce the total product.

True/False?

False, increases in the variable input eventually reduce the marginal product of the input.
question

If the labor elasticity of output is 0.65, then the anticipated increase in output for a 3% increase in labor would be approximately 1.95%.

True/False?

True, the reason for the word “approximately” is that elasticities are best interpreted for very small changes in the input. Elasticities involve first derivatives that are precise only in the limit.

question
The combinations of inputs costing a constant C dollars is called:
isocot line
question
The marginal product is defined as:
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.
question
Suppose that a firm uses two inputs: capital and labor. It has selected the levels of usage of capital and labor at which MPK = 50 and MPL = 20. If the cost of labor is \$5 per unit and the cost of capital is \$10 per unit:
the firm should increase its usage of capital relative to labor.
question
Which of the following is never negative?
Average product
question
If the average product curve is rising, the marginal product curve:
Must be above the average product curve.
question
An isoquant curve shows
all the alternative combinations of two inputs that yield the same maximum total product.
question
The marginal rate of technical substitution is
the rate at which a producer is able to exchange, without affecting the quantity of output produced, a little bit of one input for a little bit of another input.
question
A negatively sloped isoquant implies
inputs with positive marginal products.
question
In the presence of a diminishing marginal rate of technical substitution between labor and capital, output can be kept unchanged only if
equal successive increases in labor go hand in hand with ever smaller sacrifices of capital.
question
A fixed input is an input
whose quantity cannot be changed in the short run.
question
The Rollee Tire Company produces tires for automobiles. In response to increased demand in the market for autos in the United States, the company is considering short-run changes that would allow it to increase production. These might include
overtime work for assembly-line employees.
question
For any commodity, the relationship between the quantities of various inputs used per period of time and the maximum quantity of the commodity that can be produced is called the
production function.
question
Production Theory

•Analogous to consumer theory

•About physical relation between inputs and outputs

•What combinations of inputs lead to specific levels of outputs?

•Good for examining implications of adjusting inputs.

•Once we understand the “how stuff is made” we can better understand supply curves and how they affect markets.

question
Factors of production

•Labor, L

•Capital, K

•Land

•Energy

•Materials

•Management

question
Production Definitions

•Fixed factors: inputs that a firm cannot cost-effectively change in the short run; e.g., buildings, machinery, land.

•Variable factors: inputs that a firm can adjust in the short run; e.g., labor, materials, management.

•Short run: period during which at least one factor is fixed

•Very short run: period during which all factors are fixed

•Long run: period during which the level (and type) of all factors can be adjusted.

•Scale: the level of fixed factors employed by a firm.

question
Returns to Inputs

•Increasing marginal product (increasing returns) from underutilized capital and opportunities for specialization

•Decreasing marginal product (decreasing return) when opportunities for better use of capital and specialization are exhausted, crowding might set in.

•Law of diminishing returns: when additional units of a variable factor are combined with other fixed factors, marginal product will decline (c.f., diminishing marginal utility).

question
Analogies for the Relation Between MP and AP

When MP > AP, then AP is RISING

When MP < AP, then AP is FALLING

IF THE MARGINAL WEIGHT ADDED TO A TEAM IS LESS THAN AVERAGE WEIGHT, THEN AVERAGE TEAM WEIGHT DECLINES

•When MP = AP, then AP is at its MAX

IF THE NEW HIRE IS JUST AS EFFICIENT AS THE AVERAGE EMPLOYEE, THEN AVERAGE PRODUCTIVITY DOES NOT CHANGE

question
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...

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