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14 views4 pages

Class 5

Uploaded by

eminsacmaci1
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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EC216 Class Questions

Chapters 6 & 7 | Production & The cost of production


(Week 10) Dec 6 & 8, 2023

1. Suppose a chair manufacturer is producing in the short run (with its existing plant and
equipment). The manufacturer has observed the following levels of production corre-
sponding to different numbers of workers:

# of workers # of chairs
1 10
2 18
3 24
4 28
5 30
6 28
7 25

(a) Calculate the marginal and average product of labor.

(b) Does this production exhibit diminishing returns to labor? Explain.

2. The marginal product of labor in the production of computer chips is 50 chips per hour.
The marginal rate of technical substitution of labor for machine capital is 1/4. What is
the marginal product of capital?

3. Consider a firm with the following production function

Q = 10K 0.5 L 0.5

where Q is the quantity of output, K is the quantity of capital and L is the quantity of la-
bor. Assume K is fixed at 16 units in the short run. Calculate the marginal productivity
of labor for the 9th worker.

1
4. Consider a tech company that can vary both its number of employees and the amount of
equipment it uses. The company’s long-run production function is given by

Q = 5L 0.6 K 0.4

where Q is the number of software units produced, K is the number of equipments, and
L is the number of workers. If the company currently employs 25 workers and has 16
equipments, calculate the marginal productivity of labor and the marginal productivity
of capital.

5. Suppose a company’s total cost function is given by TC = 50Q2 +300Q+2000, where Q


is the quantity of goods produced. The total cost includes both variable and fixed costs.
The fixed cost of the company is $2000.

(a) Calculate the average total cost when the quantity produced is 10 units.

(b) Calculate the average fixed cost when the quantity produced is 10 units.

(c) Calculate the average variable cost when the quantity produced is 10 units.

(d) Calculate the marginal cost when the quantity increases from 10 to 11 units.

6. A firm is trying to determine the optimal combination of labor and capital to produce a
certain level of output most efficiently. The firm’s production function is

Q = 6L 0.4 K 0.6

where Q is the total output, L is labor, and K is capital. The firm faces an isocost line
given by 8L + 12K = 96, where 8 and 12 are the unit costs of labor and capital, respec-
tively. Determine the optimal combination of labor and capital the firm should use to
minimize cost while maintaining production.

2
7. Consider a firm producing goods using labor and capital. The firm’s production func-
tion is given by
Q = 2K 0.5 L 0.5,

where Q is the quantity of output, L is the quantity of labor, and K is the quantity of
capital. The firm faces a wage rate w of $20 per unit of labor and a rental rate r of $10
per unit of capital. The firm’s total budget for these inputs is $1000.

(a) Calculate the Marginal Rate of Technical Substitution (MRTS) for labor and capi-
tal based on the given production function.

(b) Determine the equation of the isocost line using the given wage and rental rates,
and the total budget.

(c) Find the optimal combination of labor and capital that the firm should employ to
maximize output given its budget constraints.

3
Essential concepts for review:

• What is a production function? How does a long-run production function differ from a
short-run production function?

• Why is the marginal product of labor likely to increase initially in the short-run as more
of the variable input is hired?

• Why does production eventually experience diminishing marginal returns to labor in the
short-run?

• Explain the term marginal rate of technical substitution. What does a MRTS = 4 mean?

• Explain why the marginal rate of technical substitution is likely to diminish as more and
more labor is substituted for capital.

• Discuss the cost concepts: total cost, fixed cost, variable cost, average variable cost and
marginal cost.

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