Chapter 6: Production ID__________________; Name__________________

HW #6: Solutions
QUESTIONS FOR REVIEW
1. What is a production function? How does a long-run production function differ from a short-run
production function?
A production function represents how inputs are transformed into outputs by a firm. We focus
on the firm with one output and aggregate all inputs or factors of production into one of several
categories, such as labor, capital, and materials. In the short run, one or more factors of
production cannot be changed (i.e., some inputs are fixed). As time goes by, the firm has the
opportunity to change the levels of all inputs. In the long-run production function, all inputs are
variable.

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?
In filling a vacant position, you should be concerned with the marginal product of the last
worker hired because the marginal product measures the effect on output, or total product, of
hiring another worker. This in turn will help to determine the revenue generated by hiring
another worker, which can then be compared to the cost of hiring another worker.
The point at which the average product begins to decline is the point where average product is
equal to marginal product. When average product declines, the marginal product of the last
worker hired is lower than the average product of previously hired workers.
Although adding more workers results in a further decline in average product, total product
continues to increase, so it may still be advantageous to hire another worker.

10. Explain why the marginal rate of technical substitution is likely to diminish as more and more labor
is substituted for capital.
As the quantities of the inputs are changed the marginal product of each input will change. As
more and more labor is added, the marginal product of labor diminishes. Because capital has
been reduced along an isoquant, each unit of capital remaining becomes more productive
(higher marginal product of capital). Therefore, more units of labor will be required to
replace each unit of capital. Alternatively, as we move down and to the right along an
isoquant along which the MRTS is diminishing, we have to give up less capital for each unit
of labor added to keep output constant.

13. Give an example of a production process in which the short run involves a day or a week and the long
run any period longer than a week.
Any small business where one input requires more than a week to change would be an example.
The process of hiring more labor, which requires announcing the position, interviewing
applicants, and negotiating terms of employment, can take a day, if done through a temporary
employment agency. Usually, however, the process takes a week or more. Expansion, requiring
a larger location, will also take longer than a week.
A hotel can change their usages of utilities such as water, electric power instantly. But, an
expansion of facilities takes more than a week.

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EXERCISES.
3. Fill in the gaps in the table below.

Quantity of Total Marginal Product Average Product

Variable Input Output of Variable Input of Variable Input

0 0 ___ ___
1 225
2 300
3 300
4 1140
5 225
6 225

Quantity of Total Marginal Product Average Product

Variable Input Output of Variable Input of Variable Input

0 0 ___ ___
1 225 225 225
2 600 375 300
3 900 300 300
4 1140 240 285
5 1365 225 273
6 1350 -15 225

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
full-time 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.
Place part time workers on the vertical axis and full time workers on the horizontal axis. The
slope of the isoquant measures the number of part time workers that can substitute for a full
time worker, while still maintaining an output level. When we are at the bottom end of the
isoquant we have a lot of full time workers and few part time workers. As we move up the
isoquant and give up full time workers, we must hire more and more part time workers to
replace each full time worker. The slope increases (in absolute value terms) as we move up
the isoquant. The isoquant is therefore convex and we have diminishing marginal rate of
technical substitution.
b. A firm finds that it can always trade two units of labor for one unit of capital and still keep
output constant.
The marginal rate of technical substitution measures the number of units of labor that can
substitute a unit of capital while still maintaining output. If the firm can always trade two

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labor for one capital then the MRTS of labor for capital is constant (1/2) and the isoquant is
linear.
c. A firm requires exactly two full-time workers to operate each piece of machinery in the factory.
This firm operates under a fixed proportions technology, and the isoquants are L-shaped. The
firm cannot exchange any labor for capital and still maintain output because it must maintain a
fixed 2:1 ratio of labor: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 is held
constant?
a. q = 3L + 2K
This function exhibits constant returns to scale. For example, if L is 2 and K is 2 then q is 10.
If L is 4 and K is 4 then q is 20. When the inputs are doubled, output will double. Each
marginal product is constant for this production function. When L increases by 1, q will
increase by 3: MPL=3. When K increases by 1 q will increase by 2: MPK=2.
1
b. q = (2L + 2K) 2

This function exhibits decreasing returns to scale. For example, if L is 2 and K is 2, then q is
√8≈2.8. If L is 4 and K is 4 then q is 4. Thai is, when the inputs are doubled, output will be
less than double.
The marginal product of each input is decreasing. This can be determined using calculus by
differentiating the production function with respect to either input, while holding the other
input constant. For example, the marginal product of labor is
∂q 2
= .
∂L 1

2(2L + 2K) 2

Since L is in the denominator, as L gets bigger, the marginal product gets smaller. If you do
not know calculus, then you can choose several values for L, find q (for some fixed value of
K), and then find the marginal product. For example, if L=4 and K=4 then q=4. If L=5 and
K=4 then q=4.24. If L=6 and K=4 then q= 4.47. Marginal product of labor falls from 0.24 to
0.23.

c. q = 3LK 2
This function exhibits increasing returns to scale. For example, if L is 2 and K is 2 then q is
24. If L is 4 and K is 4 then q is 192. When the inputs are doubled, output will more than
double. Notice also that if we increase each input by the same factor λ then we get the
following:

q'= 3(λL)(λK) 2 = λ 3 3LK 2 = λ 3q .

Since λ is raised to a power greater than 1, we have increasing returns to scale.
The marginal product of labor is constant and the marginal product of capital is increasing.
2
For any given value of K, when L is increased by 1 unit, q will go up by 3K units, which is
a constant number. Using calculus, the marginal product of capital is MPK=2*3*L*K. As K
increases, MPK also increases. If you do not know calculus then you can fix the value of L,
choose a starting value for K, and find q. Now increase K by 1 unit and find the new q. Do
this a few more times and you can calculate marginal product. This was done in part b above,
and is done in part d below.
1 1
d. q=LK 2 2

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This function exhibits constant returns to scale. For example, if L is 2 and K is 2 then q is 2.
If L is 4 and K is 4 then q is 4. When the inputs are doubled, output will exactly double.
Notice also that if we increase each input by the same factor λ then we get the following:
1 1 1 1

q'= (λL) 2 (λK ) 2 = λL2K 2 = λq .

Since λ is raised to the power 1, we have constant returns to scale.
The marginal product of labor is decreasing and the marginal product of capital is decreasing.
Using calculus, the marginal product of capital is
1

L2
MPK = 1 .
2K 2

For any given value of L, as K increases, MPK will increase. If you do not know calculus then
you can fix the value of L, choose a starting value for K, and find q. Let L=4 for example. If
K is 4 then q is 4, if K is 5 then q is 4.47, and if K is 6 then q is 4.89. The marginal product of
the 5th unit of K is 4.47-4=0.47, and the marginal product of the 6th unit of K is 4.89-4.47=0.42.
Hence we have diminishing marginal product of capital. You can do the same thing for the
marginal product of labor.
1
e. q = 4L2 + 4K
This function exhibits decreasing returns to scale. For example, if L is 2 and K is 2 then q is
13.66. If L is 4 and K is 4 then q is 24. When the inputs are doubled, output will less than
double.
The marginal product of labor is decreasing and the marginal product of capital is constant.
For any given value of L, when K is increased by 1 unit, q will go up by 4 units, which is a
constant number. To see that the marginal product of labor is decreasing, fix K=1 and choose
values for L. If L=1 then q=8, if L=2 then q=9.65, and if L=3 then q=10.93. The marginal
product of the second unit of labor is 9.65-8=1.65 and the marginal product of the third unit of
labor is 10.93-9.65=1.28. Marginal product of labor is diminishing.

CHAPTER 7
THE COST OF PRODUCTION
QUESTIONS FOR REVIEW
3. Please explain whether the following statements are true or false.
1. If the owner of a business pays himself no salary, then the accounting cost is zero, but the economic
cost is positive.
True. Since there is no monetary transaction, there is no accounting, or explicit, cost.
However, since the owner of the business could be employed elsewhere, there is an economic
cost. The economic cost is positive, reflecting the opportunity cost of the owner’s time. The
economic cost is the value of the next best alternative, or the amount that the owner would
earn if he took the next best job.
2. A firm that has positive accounting profit does not necessarily have positive economic profit.
True. Accounting profit considers only the explicit, monetary costs. Since there may be some
opportunity costs that were not fully realized as explicit monetary costs, it is possible that
when the opportunity costs are added in, economic profit will become negative. This
indicates that the firm’s resources are not being put to their best use.
3. If a firm hires a currently unemployed worker, the opportunity cost of utilizing the worker’s services
is zero.
False. The opportunity cost measures the value of the worker’s time, which is unlikely to be
zero. Though the worker was temporarily unemployed, the worker still possesses skills,
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which have a value and make the opportunity cost of hiring the worker greater than zero. In
addition, since opportunity cost is the equivalent of the worker’s next best option, it is
possible that the worker might have been able to get a better job that utilizes his skills more
efficiently. Alternatively, the worker could have been doing unpaid work, such as care of a
child or elderly person at home, which would have had a value to those receiving the service.

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