ECONOMICS FOR

I E R
ENGINEERS
XAV
UCHUT346
O N
S T
G
N Credits: 2
H I

Hingston Xavier, Assistant Professor - Christ College of Engg

 Economics
• Economics originated from the Greek word
‘IOKONOMIA’ which means Household
Management
I E R
AV > 1776 >
• Adam Smith ( Father of Economics)
‘Wealth of Nations’ N
X
T O
• Economics studies
G S how the society and
N the limited resources to satisfy
individuals Iuse
H
the unlimited wants.

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Basic Economic Problems /
Central Problems in an Economy
• Basic concern : Scarcity of Resources ( Limited
Resources and Unlimited Wants)
• Basic Economic Problems or CentralI E R Problems
in an Economy as follows : AV
X
O N
1. The Problem of Allocation of Resources.
2. The Problem of S T
Fuller Utilization of Resources.
N G
I
H of Growth of Resources.
3. The Problem
4. The Problem of Efficiency.
Hingston Xavier, Assistant Professor - Christ
College of Engg
 The Problem of Allocation of Resources

• The major concern pertains to

• 1. What to Produce ? ( Produce according to
the current needs of an economy) I E R
V
• 2. How to Produce ? ( L orXK,ADepends on Price
and Availability) O N
• 3. For whom to S T
Produce ? ( For society and
N G
household)
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 The Problem of Fuller Utilization of
Resources
• Optimum usage of limited resources

• No wastage I E R
AV
X
• Best efficient usage O N
of scarce resources to tap
S T
N G
maximum productive capacity
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 The Growth of Resources
• To improve the standard of living
• To achieve economic growth of an economy
• It is through Technological Advancement
E R
where an economy increase theI recourse limit
AV
• Technology AdvancementX> More Growth for
an economy O N
S T
TheIN G
Problem of Efficiency
H of resources
• Efficient usage

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Production Possibility Curve (PPC) or
Production Possibility Frontier (PPF)
• PPC or PPF shows the various combinations of
two commodities that can be produced with
latest technology available and within
I E R given
A V
resources utilised fully and efficiently.
X
Assumptions
O N
 Only 2 commodities S T
N G
I
 Latest technology
H
 Fuller utilisation of resources

Hingston Xavier, Assistant Professor - Christ

College of Engg
 I E R
AV
X
O N
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
Explanation
• Any point on PPC shows fuller utilisation of
resources
• Any point above or beyond PPC > point cannot be
attained, beyond the scope
• Any point below the PPC shows theI under E R
A V
utilisation of resources X
• PPC is downward slopping O N curve and concave in
shape shows resources S T are transferred from one
G
N that’s why it is known as
use to otherIuse,
H curve.
transformation
• It is also known as production boundary or
production frontier
Hingston Xavier, Assistant Professor - Christ
College of Engg
 Features of Production Possibility Curve

• PPC slopes downward: Production of one

good can be increased only after sacrificing
production of some quantity of the
I E Rother
good. A V
X
O N
• PPC is concave to the origin: A production
possibility curve S T
is concave to the point of
G
N of increasing marginal rate of
I
origin because
H (MRT) or increasing marginal
transformation
opportunity cost (MOC).
Hingston Xavier, Assistant Professor - Christ
College of Engg
• Marginal opportunity cost is opportunity cost
of good X gained in terms of good Y given up. It
I E R
is also called Marginal Rate of Transformation
(MRT). A V
X that slope of PPC
N
• Concave shape of PPC means
O that MRT increases.
T
increase which implies
S
G
N for producing an additional unit
• It means thatI
of a good,Hsacrifice of units of other good (i.e.
opportunity cost) goes on increasing.
Hingston Xavier, Assistant Professor - Christ
College of Engg
Slope of PPC is defined as the quantity of good Y
given up in exchange for additional unit of good X

I E R
AV
X
O N
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Shift in PPC
Shift in PPC shows technological
growth in the economy
I E R
AV
X
O N
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Law of diminishing marginal utility
Basic Concepts
Utility
The want satisfying capacity of a commodity is known as utility. It is
expressed in Utils. Utility is a cardinal concept i.e., it can be measured.

I E R
Benham formulated the unit of measurement of utility as utils.
Total Utility ( TU)
AV
X
TU refers to the total satisfaction derived by the consumer from the
consumption of a given quantity of a commodity.
O N
TUn = MU1 + MU2 + .....+ Mun
S T
Marginal Utility (MU)IN
G
MU refers to the Hadditional utility derived by the consumer from the
consumption of an additional unit of a commodity
MU = TU n – TU n-1
HingstonMU
Xavier,= d(TU)
Assistant Professor - Christ
College of Engg
 Law of Diminishing Marginal Utility Theory
(DMU) / Theory of Consumer Behaviour
• Theory has been developed by [Link] Marshall
Assumptions of the Theory
 Rationality
I E R
AV and normal
 Commodities should be homogenous
X
 No time gap between theNconsumption of goods
T O
 No change in tasteSand preferences
 No change inIN G
price of the commodity
H

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Statement of Theory
• As the consumer consumes more and more
units of a same good, the additional utility
(MU) from each additional units E
I R
goes on
decreasing. AV X
O N
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
Units TU MU
Consu
med

0 0 0

1 10 10

I E R
2 18 8
AV
X
3 24 6
O N
4 27 3
S T
N G
5 29
H
2 I
6 29 0

7 27 -2
Hingston Xavier, Assistant Professor - Christ
College of Engg
STAGE 1 > Increasing Returns
• TU , MU increases at an increasing rate
Stage 2 > Diminishing Returns
• MU starts falling
• TU increases at a diminishing rate
I E R
V reaches zero
• At the end of second stage ,AMU
X
O N
and TU reaches at its maximum (Point M )
T
Stage 3 > NegativeSReturns
G
N MU becomes negative
• After point
H IM,
• TU starts falling
NOTE : TU moves according to MU
Hingston Xavier, Assistant Professor - Christ
College of Engg
 Consumer Equilibrium
• According to DMU ,the consumer reaches
equilibrium when MU of last unit is equal to
price of the commodity
I E R
V
 When he consumes only oneAcommodity
MU = N
X
PRICE
T O
 When he consumes
G S more than one commodity
N X , Y , Z) - Law of Equi-
( ConsumesIGoods
Marginal HUtility
MUx = MUy = MUz ………. MUn
Px Py Pz Pn
Hingston Xavier, Assistant Professor - Christ
College of Engg
 Demand
• Demand is the desire backed by the ability
and willingness to pay for a commodity.
E
• Price is the value of a thing expressed
I R in terms
of money. A V
X
• Demand for a commodityO N : it refers to the qty
of a commodity S T
demanded in the market in a
G
given period
H INof time at a given price.

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Determinants of Demand /
Factors affecting Demand
• Price of the commodity ( P rises, DD falls and
vice versa )
I E R
Exceptional cases: Giffen goods (Essential) and
Veblen goods (Luxury) A V
X
• Income of the consumer
O N (Y)
S
Y rises, DD rises and Tvice versa (Normal Goods)
N G
H I
Y rises ,DD decreases (Inferior Goods)
Y increases or decreases , DD remains constant (
Exceptional goods)
Hingston Xavier, Assistant Professor - Christ
College of Engg
• Taste and preferences of consumer

• Price of other commodity

 Substitute goods R
 Complementary goods V I E
XA
O N
T
• Consumer Expectations
S
N G
H I
• Size of population

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Demand Function
• It shows the functional relationship between
the demand for a commodity and factors
affecting demand is called demandERfunction. V I
XA
O N
Dn = f( Pn, P1…Pn-1, Y , T , E , H , G …. U)
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Law of Demand
• Statement of Law

“Other things remains constant I,Ethe R quantity

demanded of a commodity A V
X increases when it’s
O N
price falls and decreases when it’s price rises”
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Demand Schedule
• It is the table that shows different quantities
of a commodity that would be demanded at
different prices. ER V I
XA
O N
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Demand Curve

I E R
AV
X
O N
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Exceptions to Law of Demand
• Inferior Goods
• Luxury Goods
• Life saving Goods I E R
AV
• Basic Necessities X
O N
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Changes in Demand
2 types of changes in demand
• Change in demand due to change in price –
E R
Expansion and Contraction of Demand
I –
AV
Movement along demand curve
X
O N
• Change in demand S Tdue to factors other than
G
N and Decrease in demand –
I
price – Increase
H
Shift in demand curve

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Change in demand due to change in price

• Price changes and other factors remains

constant
I E R
AV
X
O N
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Change in demand due to factors other than price

• Other factors changes and price remains

constant
I E R
AV
X
O N
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Elasticity of Demand
• It refers to the degree of responsiveness
change in qty demanded of a commodity due
I E R
to change in price or any other factors.
V
• It was put forward by AlfredAMarshall
X
of N
• 3 Types of elasticity O demand
Price Elasticity ST
N G
I
Income Elasticity
H
Cross Elasticity
Hingston Xavier, Assistant Professor - Christ
College of Engg
 Price Elasticity of Demand
(ep)
• It refers to the degree of responsiveness change
in qty demanded of a commodity due to change
in price.
I E R
V
Types of price elasticities of Demand
A
X
1. Perfectly elastic demand
O N
T
2. Perfectly inelasticSdemand
3. Unit elasticIN G / Unitary elastic demand
demand
H
4. Elastic demand / More elastic demand
5. Inelastic demand / Less elastic demand
Hingston Xavier, Assistant Professor - Christ
College of Engg
 Perfectly Elastic Demand
• With a small change in price there would be
an infinite change in qty demanded. It is an
ideal and imaginary situation.
I
• Demand curve would be a horizontal E R straight
AV
line parallel to x - axis X
N
O would be infinity
• In this case price elasticity
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Perfectly Inelastic Demand
• With a small change in price there would be
no change in qty demanded. It exists in case of
essentials like life saving drugs.
• Demand curve would be a vertical I E R
straight line
parallel to Y - axis A V
X
N
• In this case price elasticity
O would be Zero
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Unit Elastic Demand/Unitary Elastic
Demand
• With a given change in price there would be
an equal and proportionate change in qty
I R
demanded for the commodity. ItEexists in case
of normal goods. A V
X
• ep = 1 N O
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
More elastic demand/ Elastic demand
• With a given change in price there would be a
more than proportionate change in qty
demanded of the commodity. It E
I R
exists in case
of luxuries. A V
X
• Ep > 1 N O
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
Inelastic demand /Less Elastic demand
• With a given change in price there would a
less than proportionate change in qty
demanded of the commodity. It E
I R
exists in case
V
of necessities like food, fuel,Aetc.
X
• Ep < 1 NO
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
Price elasticity of demand: Measurement
using Percentage Method

Percentage method is also called proportionate

method. The absolute value of the coefficient of
Rinfinity.
elasticity of demand ranges from zeroEto
I
AV
X
O N
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Numerical Problems
• Suppose the qty demanded of a commodity
was initially 800 units at a price of 10rs and
increases to 1000 units when price
I E Rfalls to 8rs.
AV
Calculate price elasticity of demand?
X
O N
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Numerical Problems
• When the price of a commodity falls by 2 per unit, its quantity
demanded increases by 10 units. Its price elasticity of demand
is 1. Calculate its quantity demanded at the price before change
which was 10 per unit.
I E R
• The quantity demanded of a commodity falls by 5 units when its
AV
price rises by 1 per unit. Its price elasticity of demand is 1.5.
X
Calculate the price before change if at this price quantity
demanded was 60 units. O N
S T
• The market demand for a good at a price of 10 per unit is 100
N G
H I
units. When its price changes its market demand falls to 50
units. Find out the new price if the price elasticity of demand is
2.
• A consumer spends 40 on a good at a price of 1 per unit and 60
at a price of 2 per unit. What is the price elasticity of demand?
Hingston Xavier, Assistant Professor - Christ
What kind of good itCollege
is?ofWhat
Engg shape its demand curve will take?
 Geometric Method
• This method is also known as ‘point method’.
• Geometric method is used to measure the elasticity
R
at a point on the straight line demand curve.
E
• Elasticity of demand is differentV atI different points
on the same straight line demand
A
X curve.
O N
S T
• According to the geometric method, elasticity of
demand at any pointG of a straight line demand curve
Nas a ratio of lower segment of the
is measuredH I
demand curve and upper segment of the demand
curve.
 I E R
AV
X
O N
S T
N G
H I
 Income Elasticity of Demand

• Income elasticity of demand measures the

relationship between the consumer’s income
and the demand for a certain good.
I E R
A
• Income elasticity of demand V denotes the
X
O N
responsiveness to change in consumers’
T
income with theSchange in the demand for a
G
IN
certain good.
H
 Income Elasticity of Demand

• Income elasticity of demand measures the

relationship between the consumer’s income
and the demand for a certain good.
I E R
A
• Income elasticity of demand V denotes the
X
O N
responsiveness to change in consumers’
T
income with theSchange in the demand for a
G
IN
certain good.
H
 Supply
• Supply refers to the quantities of a commodity
which a seller offers for sale at a particular
price in a given period of time. ER
V I
X A
• It refers to the desired qty of commodity that
the seller offer for saleN
in the market.
T O
G S
I N
H

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Factors affecting Supply
• Price of the commodity ( P rises SS rises)
• Goals of the firm
• Price of other commodities I E R
A V
• X
Price of factors of production
• State of technology O N
S T
• G
GovernmentNTaxation
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Supply function
• It shows the functional relationship between
supply and factors affecting the supply
I E R
AV
X
N
O Gf, T, E, Gt, N….U)
Sn = f(Pn, Pn...Pn-1,
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Law of Supply

‘Other things remains constant, the quantity

E
supplied increases with rise in price
I Rof the
A
commodity and quantity suppliedV decreases
with fall in the price ofN
X
the commodity’
T O
G S
I N
H

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Supply Schedule
• It is a table shows the amounts of a
commodity supplied at a given period of time
at various prices ER V I
XA
O N
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Supply Curve

I E R
AV
X
O N
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Changes in Supply
2 types of changes in Supply
• Change in supply due to change in price –
E R
Expansion and Contraction of supply
I –
Movement along supply curveAV X
O N
• Change in supply S T
due to factors other than
G
N and Decrease in supply – Shift
I
price – Increase
H
in supply curve

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Change in supply due to change in price

• Price changes other factors remains the same

I E R
AV
X
O N
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Change in supply due to factors other
than price
• Other factors changes and price remains the
same
I E R
AV
X
O N
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Elasticity of Supply (Es)
• It refers to the degree of responsiveness change in qty
supplied of a commodity due to change in price or any
other factors.
I E R
V
• We have only price elasticity under Elasticity of Supply
A
( Es) X
1. Perfectly elastic supply O N
S T
2. Perfectly inelastic supply
N G
I
3. Unit elastic supply / Unitary elastic supply
H
4. Elastic supply / More elastic supply
5. Inelastic supply / Less elastic supply
Hingston Xavier, Assistant Professor - Christ
College of Engg
 Perfectly elastic supply

• With a small change in price there would be

an infinite change in qty supplied.
• Supply curve would be a horizontalI E Rstraight
line parallel to x - axis A V
X
O N
• In this case price elasticity would be infinity
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Perfectly Inelastic supply
• With a small change in price there would be
no change in qty supplied.
• Supply curve would be a vertical straight line
parallel to Y - axis
I E R
AV be Zero
• In this case price elasticity would
X
O N
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Unit elastic supply / Unitary elastic supply

• With a given change in price there would be

an equal and proportionate change in qty
supplied for the commodity
I E R
• es = 1 AV X
O N
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
Elastic supply / More elastic supply
• With a given change in price there would be a
more than proportionate change in qty
supplied of the commodity.
I E R
• Es > 1 AV X
O N
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Inelastic supply / Less elastic supply
• With a given change in price there would a
less than proportionate change in qty supplied
of the commodity.
I E R
• Es < 1 AV X
O N
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Equilibrium Price & Quantity
• Equilibrium is a position or situation from which
there is no tendency to change. It is a state of
balance or rest.
Equilibrium Price I E R
Qd = QsXAV
it is the price at which
O N
qty demanded of a
commodity equals S T
to the quantity supplied of
N G
the commodity
H I
Thus demand and supply is known as Invisible
hands of the market
Hingston Xavier, Assistant Professor - Christ
College of Engg
Determination of Equilibrium Price and Quantity

I E R
AV
X
O N
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 I E R
AV
X
O N
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Effects of changes in demand and supply
on equilibrium price
• Increase in Demand
• Decrease in Demand.
• Increase in Supply I E R
AV
• Decrease in supply X
O N
S T
N G
H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
• Suppose the demand function of a particular
commodity for the year 2006 is given by
Qd = 1000 – P and supply function
I E R
is given as
Qs = 100 + 4P. A V
• Find equilibrium price N
X
& qty
T O
G S
• What is the excess demand or excess supply
N a.) 500 b.) 100
when priceIis
H

Hingston Xavier, Assistant Professor - Christ

College of Engg
• Given the following demand and supply
functions of a particular commodity . Find the
equilibrium price and quantity ? ER
V I
• Qd =100 – P
XA
• P = 10 + 2Qs O N
Solution: S T
N G
Qd = Qs H I

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Production
• It is the process of transformation of inputs
into output.
• Input > Factors of production IER
Production Function A V
X
O N
It is defined as the technical relationship
S
which shows maximum
T level of output
G
N given input
producible H I
from
Q = f ( La, L , K , O )
 Types of Production Function
• Based on the availability of inputs production
function has been classified into two
R Run)
1.) The law of Variable ProportionI(EShort
2.) The law of Fixed ProportionA V
X (Long Run)
O N
S T
N G
H I
Variable Proportion
It is the arrangement where the quantity of a
single input varies, keeping the quantities of
other inputs constant . It happens in short run
due to unavailability of all inputs. R
V I E
Fixed Proportion
X A
O N
It is the arrangement where the quantities of
S
all inputs are variedT in the same and equal
[Link] It G
happens in long run.
H
 Basic Production Concepts
Total Product (TP) / Total Physical Product (TPP)
It refers to the total amount of a commodity
produced during given period of time
I E Rwith each
set of inputs. It is also known as
A VTotal Returns.
X
Average Product (AP) N
Ousing per unit of the
It is the output produced
S T
variable factor N G
input.
I
H AP = TP / L OR Q / L
( L is the variable factor in most of the cases )
Marginal Product (MP)
• It is the addition to the total product from the
E
use of an additional unit of variable
I Rfactor
input A V
X
• MP = TP n – TP n-1 ON
• MP = d (TP) GOR
T
S TP / L
I N
H
d(L)
 The Law of Variable Proportion
• It is also known as Law of Diminishing Returns,
Returns to Factor , Short run Production
Function
I E R
• The law examines the shortA V relationship
run
between one variable N
X
input and output
produced, while S T O
keeping all other factor inputs
constant ING
H
Statement of Law
The law of variable proportion states that as
more and more units of a variable
I E R
factor are
applied to a given quantity of
A Va fixed factor ,
the total product increase Xat an increasing rate
N
O it will increases at a
T
initially , but eventually
S
diminishing N G
rate.
H I
Variable Factor TP AP MP STAGES
Employed
0 - - - -

1 8 8 8 Stage 1 (IRF)

2 20 10 12 Stage 1 (IRF)

3 36 12
I
16
E R Stage 1 (IRF)

4 48 12
AV 12 Stage 2 (DRF)
X
5 55
O N
11 7 Stage 2 (DRF)

S T
6
N
60G 10 5 Stage 2 (DRF)

7
I
H 60 8.6 0 Stage 3 (NRF)

8 56 7 -4 Stage 3 (NRF)
 I E R
AV
X
O N
S T
N G
H I
 STAGE 1 : Increasing Returns to Factor (IRF)
 TP , AP , MP increases at an increasing rate
in the initial stage of production .
 This is due to fuller utilization of fixed
factors and division labour I E R
A V
STAGE 2 : Diminishing ReturnsX to Factor (DRF)
 Most relevant stage O in
N
production
S T
 MP falls and TP
N Gincreases at a diminishing rate
 At the end
I
H of second stage , TP reaches max
and MP reaches zero
 AP also falls
 STAGE 3 : Negative Returns to Factor (NRF)
• MP becomes negative ,TP falls but remains
positive.
• AP remains falling
I E R
Observations AV
X
 When MP > AP , AP O N
Rises
 When MP = APG, S
T
AP remains constant
I N
H< AP , AP falls
 When MP
 Returns to Factor
• Single factor input varies
• Short run
• Factor quantity Varies I E R
A V
• It is the change in output Xwhen one input
varies while keepingO allNother inputs constant
S T
N G
H I
 Returns to Scale
• It describes the change in output when all inputs
are changed in same and equal proportion
• All factor input varies
I E R
• Long run A V
X
We have 3 stages in Returns
O N to Scale:
S
1.) Increasing Returns Tto Scale
G
IN to Scale
2.) ConstantHReturns
3.) Diminishing Returns to Scale
 Cobb – Douglas Production Function
• It was proposed by Wickseed for the first time

I E
• It was statistically tested by CharlesR.W. Cobb
and Paul. H. Douglas in 1928 A V
X
O N
S T
• They used theG data from manufacturing sector
I N
Hthe years 1899 to 1922
of USA for
 I E R
AV
X
O N
S T
N G
H I
• Output elasticity measures the responsiveness
of output to a change in levels of either labor
or capital used in production. ER
I
aV
• C - D Production function is A homogenous
production function N
X
T O
• C - D ProductionS function always exhibits
G
N to scale
I
constant returns
H
α+β=1
• Consider the following production function
Q = 150 K O.7 L 0.5 where
1.) K = 1, L = 1 I E R
A V
2.) K = 2, L = 2 X
3.) K = 4, L = 4 O N
S T
Find the value N G
of Q and identify the returns to
H I
scale of production .
• Suppose the production function is given as
Q = 2K1/2 L1/2 .
a.) What will be the output when K = 16 and L =
36

I E R
b.) What is the marginal product of labour when
K = 16 and L = 36 A V
X of capital when
N
C.) What is the average product
K = 16 and L = 36STO
G
N of units of capital required
I
d.) Find the number
H 40 units of output if L = 25?
to produce