Problems on theory of production (Chapter 6)

1. A Company has an assembly line of fixed size A. Total output is a function of the number
of workers as shown in the following schedule:
No. of Workers (L)
0

Total Output (Q)

0

10

2
3

30
50

56

59

6
7

60
60

58

(a) Determine schedules for marginal productivity of labor and average productivity
of labor.
(b) Determine the rage of employment that show the three stages of production
(c) Indicate the level of employment at which the law of diminishing returns first
occurs.
(d) Suppose the market price of the output $15 and the wage rate is $90, how many
workers would this firm hire? What if the market price decreases to $10?
(e) Suppose the market price increases to $25, what is the highest wage rate the firm
would be willing to pay to employ 4 units of labour?
2. A certain production process employs two inputslabor (L) and raw materials (R). Output
(Q) is a function of these two inputs and is given by the following relationship:
Q = 6L2 R2 .10L3 R3
Assume that raw materials (input R) are fixed at 10 units.
(a) Determine the total product function (TPL) for input L.
(b) Determine the marginal product function for input L.
(c) Determine the average product function for input L.
(d) Find the number of units of input L that maximizes the total product function.
(e) Find the number of units of input L that maximizes the marginal product
function.
(f) Find the number of units of input L that maximizes the average product function.
(g) Determine the boundaries for the three stages of production.
3. Indicate whether each of the following statements is true or false.
(a) If the marginal product of capital increases as capital usage grows, the returns to capital
are decreasing.
(b) Marginal revenue product measures the output gained through expanding input usage.
(c) Increasing returns to scale and declining average costs are indicated when Q > 1.
(d) When the law of diminishing returns takes effect, a firm's average product will start to
decline.

(e) Decreasing returns to scale occurs when a firm has to increase all inputs at an increasing
rate to maintain a constant rate of increase in its output.
(f) stage I of the production process ends at the point where the law of diminishing returns
occurs.
4. Following are different algebraic expressions of the production function. Decide whether each
one has constant, increasing, or decreasing returns to scale (end of chapter problems # 13).
(a) Q = 75L0.25 K0.75
(b) Q = 75A0.15 B0.40 C0.45
(c) Q = 75L0.60 K0.70
(d) Q = 100 + 50L +50 K
(e) Q = 50L +50 K + 50LK
(f) Q = 50L2 +50 K2
(g) based on the answers for the preceding equations, can you make any generalizations about
the functional form of a production equation, the relative magnitudes of the coefficients,
and the nature of the returns to scale? Explain.

MCQs:
5. In a relationship among total, average and marginal products, where TP is maximized:
a. AP is maximized
b. AP is equal to zero
c. MP is maximized
d. MP is equal to zero

6. In a production process, an excessive amount of the variable input relative to

the fixed input is being used to produce the desired output. This statement is true
for:
a.
b.
c.
d.

stage II
stages I and II
when Ep = 1
stage III

7. Marginal revenue product is:

a.
defined as the amount that an additional unit of the variable input adds
to the total revenue
b.
equal to the marginal factor cost of the variable factor times the
marginal revenue resulting from the increase in output obtained
c.
equal to the marginal product of the variable factor times the marginal
product resulting from the increase in output obtained
d. a and b

a.
b.
c.
d.

8.
When PX = $60, MPX = 5 and MPY = 2, relative employment levels are
optimal provided:
PY = 16.7.
PY = $24.
PY = $60.
PY = $150.

9. Total output is maximized when:

a. average product equals zero.

b. marginal product is maximized.

c. average product is maximized.
d. marginal product equals zero.
10. If tripling the quantities of all inputs employed doubles the quantity of output produced, the
output elasticity:
a. equals one.
b. is greater than one.
c. cannot be determined without further information.
d. is less than one.
11. The output effect of a proportional increase in all inputs is called:
a. returns to scale.
b. returns to a factor.
c. total product.
d. marginal product.

12. Which of the following indicate when Stage I ends and Stage II begins in the
short-run
production?
a. when AP = 0
c. when MP = AP

b. when MP = 0
d. when MP starts to diminish

13. Which of the following statements about the short-run production function is true?
a. MP always equals AP at the maximum point of MP.
b. MP always equals zero when TP is at its maximum point.
c. TP starts to decline at the point of diminishing returns.
d. When MP diminishes, AP is at its minimum point.
14. Assume a firm employs 10 workers and pays each $15 per hour. Further
assume that the MP
of the 10th worker is 5 units of output and that the price of the output is $4.
According to economic theory, in the short run,
a. the firm should hire additional workers.
b. the firm should reduce the number of workers employed.
c. the firm should continue to employ 10 workers.
d. more information is required to answer this question.
15. A firm that operates in Stage III of the short-run production function
a. has too much fixed capacity relative to its variable inputs.
b. has too little fixed capacity relative to its variable inputs.
c. has greatly overestimated the demand for its output.
d. should try to increase the amount of variable input used.

SOLUTIONS:
1. (a) MP and AP schedules are shown in the following table:
Labour (L) Total Output (Q)
MPL
0
0
1
10
+10
2
30
+20
3
50
+15
4
56
+6
5
59
+3
6
60
+1
7
60
0
8
58
2
(b) Referring to the table:
Stage I: 0 to 3 units of L (0 to max. AP)
Stage II: 3 to 7 units of L (max. AP to MP=0)
Stage III: 7 units of L and above (MP=0 onwards)

APL
10
15
16.67
14
11.8
10
8.57
7.25

(c) Based on the knowledge of the law of diminishing returns in relation to the three
stages of production and without knowing the MP for the first two workers, we can
expect that the law of diminishing returns occurs with the addition of the second
worker. This is because AP reaches its maximum at 3 workers and we know that
the law of diminishing returns occurs just before this maximum is reached.
Whoever, since MPL is maximum at two units of labour, the law of diminishing
returns start to take effect with the employment of 2 units of L
(d) Optimal level of employment is attained where MRP = wage rate, and the firm
would hire 4 unit of L. If price decreases to $10, the firm would hire only three
worker, since the MRP of the fourth worker is $60 < wage rate.
(e) If market price increases to $25, The MRP of the fourth labour would be $150, and
that is the maximum the form would be willing to pay as wage.
2. @ R = 10:
(a) TPL = 6L2 (10)2 .10L3 (10)3 = 600L2 100L3
d(TPL )
= 1200L 300L2
(b) MPL =
dL
TP
600L2 100L3
=
(c) APL = L
= 600L 100L2
L
L
d (TPL )
(d)
= 0 (condition for maximum point on TPL) , so:
dL
1200L 300L2 = 0, OR, L(1200 300L) = 0 ,
OR, L = 4 (L = 0 is not a maximum, since d2 (TPL)/dL2 > 0)
d( MPL )
(e)
= 0 (condition for maximum point on MPL)
dL
d( MPL )
= 1200 600L = 0, L = 2
dL
d( APL )
= 0 (condition for maximum point on APL)
(f)
dL

d( APL )
= 600 200L = 0, L = 3
dL
(g) Stage I: 0-3, APL increasing.
Stage II: 3-4, MPL > 0
Stage III: 4 - , MPL 0
3. (a) False. Returns to the capital input factor are increasing when the marginal product of
capital increases as capital usage grows
(b) False. Marginal revenue product is the revenue generated by expanding input usage, and
represents the maximum that could be paid to expand usage. Marginal product
measures the change in output given a change in an input.
(c) True. When Q > 1, the percentage change in output is greater than a given percentage
change in all inputs. Thus, increasing returns to scale and decreasing average costs are
indicated.
(d) False. A firms marginal product will start to decrease.
(e) True. The increase in all of its inputs at an increasing rate will make up for the increase
in output at a decreasing rate, thereby resulting in a constant rate of increase in output.
(f) False. Stage I ends shortly after this, when the already diminishing marginal product
intersects the average product at the latters maximum value.
4.

a.
b.
c.
d.
e.
f.
g.

CRTS
CRTS
IRTS
DRTS
IRTS
IRTS
For the Cobb-Douglas type of production function, the answers indicate that those
whose coefficients sum to unity will exhibit CRTS, less that unity DRTS, and
greater than unity IRTS. (Refer to problems 13a, b., c.)

5. d
6. d
7. a
8. b
9. d
10. d
11. a
12. c
13. b
14. a
15. b