7/28/2021 Man 503

Man
503                                 HOMEWORK
4                      FALL 2009
 
1)  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?
Let Q be the output of DISK, Inc., q2,
be the output of FLOPPY, Inc., and X
be
the same equal amounts of capital and labor for the two firms.  Then, according
to their production
functions,
q = 10X0.5X0.5 = 10X(0.5 + 0.5)
= 10X
and
q2 = 10X0.6X0.4 = 10X(0.6 + 0.4)
= 10X.

Because q = q2, both firms generate the

same output with the same inputs.  Note
that if the two firms both used the same amount of capital and the same amount
of labor, but the amount of capital was not equal to the amount of labor, then
the
two firms would not produce the same level of output.  In fact, if K>L then q2>q.
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.
With capital limited to 9 machine units, the production functions become
q =
30L0.5 and q2 = 37.372L0.4.  To determine the production function with the
highest marginal productivity of labor, consider the following table:

L q MPL q MPL
Firm 1 Firm 1 Firm 2 Firm 2

0  0.0 ___  0.00 ___

1 30.00 30.00 37.37 37.37

2 42.43 12.43 49.31 11.94

3 51.96  9.53 58.00  8.69

4 60.00  8.04 65.07  7.07

For each unit of labor above 1, the marginal productivity
of labor is greater for the first firm,
DISK, Inc.
 
 
2) 
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.                 

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.  When K increases by 1 q
will increase
by 2.

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b.                 

This function exhibits decreasing

returns to scale.  For example, if L is 2
and K
is 2 then q is 2.8.  If L is 4 and
K is 4 then q is 4.  When the inputs are
doubled,
output will 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

.
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.                  

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  then we get the
following:

.
Since   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.  For any given value of K, when L is increased
by 1 unit, q will go
up by  units, which is a
constant number.  Using calculus, the
marginal
product of capital is MPK=2*3*L*K. 
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.  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.

d.                 

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  then we get the
following:

.
Since  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  

.
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

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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.

e.                 

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.
 

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