1. What is a production function?

How does a long-run production

function differ from a short-run production function?
What is a production function? How does a long-run
production function differ from a short-run production
function?
A production function is a mathematical relationship that
describes how inputs (like labor and capital) are transformed into
output. It shows the maximum output that can be produced with
given amounts of inputs.
 Short-run production function: At least one input (usually
capital) is fixed, while others (like labor) can vary. It reflects
constraints on changing all inputs quickly.
 Long-run production function: All inputs are variable. Firms
have the flexibility to adjust all factors of production to find the most
efficient production method.

2. Why is the marginal product of labor likely to increase initially in the

short run as more of the variable input is hired?
Why is the marginal product of labor likely to increase
initially in the short run as more of the variable input is
hired?
Initially, the marginal product of labor (MPL) increases due to
increasing returns to labor. This is often because:
 Workers can specialize.
 Fixed capital (like machinery) is used more efficiently.
 Coordination improves with more hands.
This phase is often called the stage of increasing marginal
returns.

3. Why does production eventually experience diminishing marginal

returns to labor in the short run?
Why does production eventually experience diminishing
marginal returns to labor in the short run?
As more workers are hired while capital remains fixed:
 Workers have to share limited capital.
 Crowding and inefficiencies emerge.
 Additional workers contribute less to output than previous ones.
This leads to diminishing marginal returns, a fundamental short-
run concept.

4. You are an employer seeking to fill a vacant position on an assembly

line. Are you more concerned with the average product of labor or
the marginal product of labor for the last person hired? If you
 observe that your average product is just beginning to decline,
should you hire any more workers? What does this situation imply
about the marginal product of your last worker hired?
You are an employer seeking to fill a vacant position on an
assembly line. Are you more concerned with the average
product of labor or the marginal product of labor for the last
person hired? If you observe that your average product is
just beginning to decline, should you hire any more workers?
What does this situation imply about the marginal product
of your last worker hired?
You should be more concerned with the marginal product of
labor (MPL) because:
 MPL tells you how much additional output the last worker
contributes.
 If MPL is above the average product (APL), APL is rising; if MPL is
below APL, APL is falling.
If the APL just starts to decline, that means the MPL has
dropped below APL, suggesting diminishing efficiency. Hiring
more workers may reduce overall productivity unless there's
another benefit (like lower labor cost or higher total output
profitably sold).

5. What is the difference between a production function and an

isoquant?
What is the difference between a production function and an
isoquant?
 Production function: Shows the maximum output possible from
different combinations of inputs.
 Isoquant: A graphical representation of all input combinations
that produce the same level of output.
In simple terms:
 A production function is an equation; an isoquant is a curve derived
from it.
 Isoquants are analogous to indifference curves in consumer
theory.

6. Faced with constantly changing conditions, why would a firm ever

keep any factors fixed? What criteria determine whether a factor is
fixed or variable?
Faced with constantly changing conditions, why would a firm
ever keep any factors fixed? What criteria determine
whether a factor is fixed or variable?
Firms keep factors fixed due to:
  Time constraints: Some resources (like buildings or machinery)
cannot be changed quickly.
 Cost or practicality: It's costly or inefficient to adjust certain
inputs frequently.
 Contracts or regulations: Long-term agreements might lock in
some inputs.
Criteria to determine if a factor is fixed or variable:
 Time horizon: Short run = some fixed factors; Long run = all
factors variable.
 Flexibility of input: Labor may be more easily adjusted than
capital.
 Cost and availability: Inputs that are costly or scarce may remain
fixed temporarily.

EXCERCISE

1. The menu at Joe’s coffee shop consists of a variety of coffee drinks,

pastries, and sandwiches. The marginal product of an additional worker
can be defined as the number of customers that can be served by that
worker in a given time period. Joe has been employing one worker, but is
considering hiring a second and a third. Explain why the marginal product
of the second and third workers might be higher than the first. Why might
you expect the marginal product of additional workers to diminish
eventually?

2. 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 corresponding to different numbers of
workers: NUMBER OF WORKERS NUMBER 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 for
this production function. b. Does this production function exhibit
diminishing returns to labor? Explain. c. Explain intuitively what might
cause the marginal product of labor to become negative.

3. Fill in the gaps in the table below. QUANTITY OF VARIABLE INPUT TOTAL
OUTPUT MARGINAL PRODUCT OF VARIABLE INPUT AVERAGE PRODUCT OF
VARIABLE INPUT 00 — — 1 225 2 300 3 300 4 1140 5 225 6 225

4. A political campaign manager must decide whether to emphasize

television advertisements or letters to potential voters in a reelection
campaign. Describe the production function for campaign votes. How
might information about this function (such as the shape of the isoquants)
help the campaign manager to plan strategy?
5. For each of the following examples, draw a representative isoquant.
What can you say about the marginal rate of technical substitution in each
case? a. A firm can hire only full-time employees to produce its output, or
it can hire some combination of fulltime and part-time employees. For
each full-time worker let go, the firm must hire an increasing number of
temporary employees to maintain the same level of output. b. A firm finds
that it can always trade two units of labor for one unit of capital and still
keep output constant. c. A firm requires exactly two full-time workers to
operate each piece of machinery in the factory.

6. A firm has a production process in which the inputs to production are

perfectly substitutable in the long run. Can you tell whether the marginal
rate of technical substitution is high or low, or is further information
necessary? Discuss.

7. The marginal product of labor in the production of computer chips is 50

chips per hour. The marginal rate of technical substitution of hours of
labor for hours of machine capital is 1/4. What is the marginal product of
capital?

8. Do the following functions exhibit increasing, constant, or decreasing

returns to scale? What happens to the marginal product of each individual
factor as that factor is increased and the other factor held constant? a. q
3L 2K b. q (2L 2K)1/2 c. q 3LK2 d. q L1/2K1/2 e. q 4L1/2 4K

9. The production function for the personal computers of DISK, Inc., is

given by q = 10K0.5L0.5 where q is the number of computers produced
per day, K is hours of machine time, and L is hours of labor input. DISK’s
competitor, FLOPPY, Inc., is using the production function q = 10K0.6L0.4
a. If both companies use the same amounts of capital and labor, which will
generate more output? b. Assume that capital is limited to 9 machine
hours, but labor is unlimited in supply. In which company is the marginal
product of labor greater? Explain. 228 PART 2 • Producers, Consumers,
and Competitive Markets expenditures and the marginal product of
nutrition expenditures are both decreasing. b. Does this production
function exhibit increasing, decreasing, or constant returns to scale? c.
Suppose that in a country suffering from famine, N is fixed at 2 and that c
20. Plot the production function for life expectancy as a function of health
expenditures, with L on the vertical axis and H on the horizontal axis. d.
Now suppose another nation provides food aid to the country suffering
from famine so that N increases to 4. Plot the new production function. e.
Now suppose that N 4 and H 2. You run a charity that can provide either
food aid or health aid to this country. Which would provide a greater
benefit: increasing H by 1 or N by 1?
10. In Example 6.4, wheat is produced according to the production
function q = 100(K0.8L0.2) a. Beginning with a capital input of 4 and a
labor input of 49, show that the marginal product of labor and the
marginal product of capital are both decreasing. b. Does this production
function exhibit increasing, decreasing, or constant returns to scale?

11. Suppose life expectancy in years (L) is a function of two inputs, health
expenditures (H) and nutrition expenditures (N) in hundreds of dollars per
year. The production function is L c H0.8N0.2. a. Beginning with a health
input of $400 per year (H 4) and a nutrition input of $4900 per year (N
49), show that the marginal product of h