PRODUCTION

1. Use the production function Q=10K0.5L0.6 to complete the following production table: (K) 6 24.5 56.3 71.8 5 4 30.3 3 45.5 2 27.3 1 10.0 29.3 1 2 3 4 5 6 (L) a. For this production system, are returns to scale decreasing constant, or increasing? Explain b. Suppose the wage rate is $28, the price of capital also is $28 per unit, and the firm currently is producing 30.3 units of output per period using four units of capital and two units of labor. Is this an efficient resource combination? Explain. What would be a more efficient (not necessarily the best) combination? Why? c. If the rate of capital input is fixed at 3 and if the output sells for $5 per unit, determine the total, average and marginal product functions and the marginal revenue product function for labor (0-6) d. Using the data from (c), if the wage rate is Rs 28 per unit, how much labor should be employed? 2. Everest publication has kept the following data on labor input and production of text books for each of the 8 production period: Production Period Labor Input Output of books (Total Product) 1 4 260 2 3 190 3 6 310 4 8 240 5 2 110 6 7 290 7 5 300 8 1 50

a) Use the data on the labor input and the total product to compute the average and the marginal product for labor input rates from 1 to 8. b) Given that the objective of the firm is to maximize profit, can you determine from these data how much output should be produced? If not, what additional information would you need? Can you think of any circumstance where the firm would use more than 6 unit of labor per period in this production process? 3. Consider two firms A & B with the following production function

Firm A: QA= 100K0.8L0.2 Firm B: QB= 100K0.5L0.5

a.) If both firms use 25 minutes of capital and 25 units of labor, what is the output rate for each firm? b.) If the input prices are r=Rs.1 and w=Rs.1, is the input combination K=25 and L=25 efficient for firm A? For firm B? c.) If the input combination K=25 and L=25 is not efficient for either firm A or form B, determine the efficient ratio of the two inputs of the each firm. 4. A production process uses only one input, labor and is described by the following production function:

Q=25L2- L3/3
Over what output range are marginal returns increasing, decreasing (but still positive), and negative? (Note: This function is applicable for only the labor input rates between 0 and 75) 5. Guwahati tyres, a small producer of automobiles tyres, has the following production function:

Q=100K0.5L0.5
During the last production period, the firm operated efficiently and used input rates of 100 and 25 for capital and labor respectively. a.) What is the marginal product of capital and marginal product of labor based on input rates specified? b.) If the price of capital was Rs.20 per unit what was the wage rate?

c.) For the next production period the price per unit of capital is expected to increase to Rs.25, while the wage rate and the labor input will remain unchanged under the terms of the labor contract with the labor union. If the firm maintains efficient production, what input rate of capital will be used?