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5
Productioin
OVERVIEW
This chapter reviews the general problem of transforming productive resources in goods and services for sale in the market. A production func tion is the technological relationship between the maximum amount of output that a ﬁrm can produce with a given combination of inputs (factors of production).The short run in production is deﬁned as that period of time during which at least one factor of production held ﬁxed. The long run in production is deﬁned as that period of time during which all factors of production are variable. In the short run, the ﬁrm is subject to the law of diminishing returns (sometimes referred to as the law of diminishing mar ginal product), which states that as additional units of a variable input are combined with one or more ﬁxed inputs, at some point the additional output (marginal product) will start to diminish. The shortrun production function is characterized by three stages of production. Assuming that output is a function of labor and a ﬁxed amount of capital, stage I of production is the range of labor usage where the average product of labor (AP _{L} ) is increasing. Over this range of output, the marginal product of labor (MP _{L} ) is greater than the average product of labor. Stage I ends and stage II begins where the average product of labor is maximized, i.e., AP _{L} = MP _{L} . Stage II of production is the range of output where the average product of labor is declining and the marginal product of labor is positive. In other words, stage II of production begins where AP _{L} is maximized, and ends wither MP _{L} = 0.
Managerial Economics: Theory and Practice
Copyright © 2003 by Academic Press.
63 All rights of reproduction in any form reserved.
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Production
Stage III of production is the range of product where the marginal product of labor is negative. In stage II and stage III of production, AP _{L} > MP _{L} .According to economic theory, production in the short run for a “ratio nal” ﬁrm takes place in stage II of production. If we assume two factors of production, the marginal rate of technical substitution (MRTS _{K}_{L} ) is the amount of a factor of production that must be added (subtracted) to compensate for a reduction (increase) in the amount of another input to maintain a given level of output. If capital and labor are substitutable, the marginal rate of technical substitution is deﬁned as the ratio of the marginal product of labor to the marginal product of capital, i.e., MP _{L} /MP _{K} . Returns to scale refer to the proportional increase in output given an equal proportional increase in all inputs. Since all inputs are variable, returns to scale is a longrun production phenomenon. Increasing returns to scale (IRTS) occurs when a proportional increase in all inputs results in a more than proportional increase in output. Constant returns to scale (CRTS) occurs when a proportional increase in all inputs results in the same proportional increase in output. Decreasing returns to scale (DRTS) occurs when a proportional increase in all inputs results in a less than proportional increase in output. Another way to measure returns to scale is the coefﬁcient of output elas ticity (e _{Q} ), which is deﬁned as the percentage increase (decrease) in output with respect to a percentage increase (decrease) in all inputs. The coefﬁ cient of output elasticity is equal to the sum of the output elasticity of labor (e _{L} ) and the output elasticity of capital (e _{K} ), i.e., e _{Q} = e _{L} + e _{K} . IRTS occurs when e _{Q} > 1. CRTS occurs when e _{Q} = 1. DRTS occurs when e _{Q} < 1. The CobbDouglas production function is the most popular speciﬁcation in empirical research. Its appeal is largely due to the fact that it exhibits several desirable mathematical properties, including substitutability between and among inputs, the law of diminishing returns to a variable input, and returns to scale. The CobbDouglas production function has several shortcomings, however, including an inability to show marginal product in stages I and III of production. Most empirical studies of cost functions use time series accounting data, which present a number of problems. Accounting data, for example, tend to ignore opportunity costs, the effects of changes in inﬂation, tax rates, social security contributions, labor insurance costs, accounting practices, etc. There are also other problems associated with the use of accounting data including output heterogeneity and asynchronous timing of costs. Economic theory suggests that shortrun total cost as a function of output ﬁrst increases at an increasing rate, then increases at a decreasing rate. Cubic cost functions exhibit this theoretical relationship, as well as the expected “Ushaped” average total, average variable and marginal cost curves.
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Multiple Choice Questions
MULTIPLE CHOICE QUESTIONS
5.1 Production function represent:
65
A. The maximum amounts of inputs required to product a given amount of output.
B. The maximum amount of output that can be obtained from a given set of inputs.
C. The minimum amount of inputs required to produce a given amount of output.
D. Both B and C are correct.
5.2 Production in the short run is:
A. The period of time during which at least one factor of production is ﬁxed.
B. The period of time during which all factors of production are variable.
C. The period of time during which all factors of production are ﬁxed.
D. Less than one year.
5.3 Production in the long run is:
A. The period of time during which at least one factor of production is ﬁxed.
B. The period of time during which all factors of production are variable.
C. The period of time during which all factors of production are ﬁxed.
D. Greater than one year.
5.4 The ﬁrm operates in the
A. longrun; shortrun
B. longrun; longrun
C. shortrun; longrun
D. shortrun; shortrun
, but plans in the
5.5 The production function:
A. Is only applicable in the short run.
B. Cannot be empirically estimated.
C. Summarizes the relationship between output and factors of production.
D. Summarizes the leastcost combination of inputs to produce a given output.
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Production
5.6 Consider the production function Q = f(K, L, M), where K is capital, L is labor, and M is land. The CobbDouglas production:
A. Is Q = AK ^{a} L ^{b} M ^{g} , where A is a constant and 0 ≤ (a, b, g) ≤ 1.
B. Illustrates the substitutability of the factors of production.
C. Can be used to determine returns to scale.
D. Is consistent with the law of diminishing marginal product.
E. All of the above.
5.7 Consider the production function Q = f(K, L), where K is capital and L is labor. The marginal product of labor is:
A. The change in total output resulting from a change in labor input.
B. Total output per unit of labor input.
C. The change in labor output resulting from a change in total output.
D. The contribution to total output from the last unit of labor employed.
E. Both A and D are correct.
5.8 Suppose that Q = f(K, L), where K is capital and L is labor. Diminishing marginal product of labor implies that:
XIII. The marginal product of labor is less than the average product of labor.
XIV. The marginal product of labor is falling.
XV. The total product of labor is increasing at a decreasing rate.
Which of the following is correct?
A. I only.
B. II only.
C. I and II only.
D. II, and III only.
5.9 The average product of capital increases when:
A. MP _{L} > MP _{K} .
B. MP _{K} > AP _{K} .
C. AP _{L} > MP _{L} .
D. MP _{K} > MP _{L} .
E. MP _{L} = MP _{K} .
5.10 In response to an increase in demand, a microchip manufacturer increased its labor force by 5 percent. This action resulted in an increase in the total product of labor. For this to happen:
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Multiple Choice Questions
67
I. The average product of labor must have increased.
II. Additional units of capital must have been employed. III. The marginal product of labor must have increased. Which of the following is correct?
A. I only.
B. II only.
C. III only.
D. I and III only.
E. None of the above.
5.11 When MP _{L} < AP _{L} , then AP _{L} must be:
A. Rising.
B. Falling.
C. Equal to MP _{L} .
D. Greater than AP _{K} .
5.12 Suppose that the ﬁrm’s production function is Q = 25K ^{0}^{.}^{5} L ^{0}^{.}^{5} . If
K = 121 and L = 36, then total output is:
A. 1,250.
B. 1,500.
C. 1,650.
D. 1,750.
5.13 Suppose that the ﬁrm’s production function is Q = 25K ^{0}^{.}^{5} L ^{0}^{.}^{5} . If
K = 100 and L = 25, then the marginal product of labor is:
A. 2.5.
B. 6.25.
C. 10.
D. 25.
5.14 Suppose that the ﬁrm’s production function is Q = 25K ^{0}^{.}^{5} L ^{0}^{.}^{5} . If
K = 225 and L = 36, then the marginal product of capital is:
A. 2.
B. 4.
C. 5.
D. 6.
5.15 Decreasing returns to scale occurs when:
A. Output decreases following a proportional increase in all inputs.
B. Output increases at a decreasing rate following a proportional increase in all inputs.
C. Output increases less than proportionally to a proportional increase in all inputs.
D. Input usage falls as the rate of output increases.
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Production
5.16 If the output remains unchanged when all inputs are doubled, then the production function exhibits:
A. Increasing returns to scale.
B. Decreasing returns to scale.
C. Constant returns to scale.
D. Zero returns to scale.
5.17 Consider Figure 1, which shows two total product curves for producing silicon chips using different amounts of a ﬁxed factor (capital) and different amounts of a variable factor (labor).
I. A movement from A to
B exhibits decreasing
returns to scale.
II. A movement from A to
C exhibits increasing
returns to scale.
III. A movement from A to
D exhibits decreasing
returns to scale.
Which of the following is correct?
A. I only.
B. II only.
C. III only.
D. I and II only.
E. II and III only.
FIGURE 1
5.18 Consider the production function Q = f(K, L), where K is capital and L is labor. Diminishing returns to labor occurs when:
A. MP _{L} declines as more labor is added to a ﬁxed amount of capital.
B. MP _{L} declines as more labor is added to an increased amount of capital.
C. MP _{L} declines because of increased specialization.
D. MP _{L} declines because the ratio of capital to labor is increasing.
5.19 The law of diminishing returns:
C. Implies that productive resources are not efﬁciently employed.
D. Is a longrun phenomenon.
E. Can only occur when all inputs are increased proportionally.
F. Is a shortrun phenomenon.
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Multiple Choice Questions
69
5.20 Which of the following production functions exhibits the law of diminishing returns as soon as production begins?
A. 100 + 5L
B. 100 + 5L + 0.025L ^{2}
C. 100 + 5L  0.025L ^{2}
D. Cannot be determined on the basis of the information provided.
5.21 Consider the production function Q = f(K, L), where K is capital and L is labor. If MP _{L} < 0, then the ﬁrm must be operating in:
A. Stage I of production.
B. Stage II of production.
C. Stage III of production.
D. Stage IV of production.
5.22 In Stage II of production:
A. TP _{L} must be increasing at an increasing rate.
B. MP _{L} must be greater than AP _{L} .
C. AP _{L} must be greater than MP _{L} .
D. AP _{L} is increasing.
E. MP _{L} must be increasing.
5.23 Stage I of production ends where:
A. 
AP _{L} = MP _{L} . 
B. 
AP _{L} is maximized. 
B. 
AP _{L} = 0. 
C. 
MP _{L} is maximized. 
D. 
Both A and B are correct. 
5.24 Stage II of production ends where:
A. MP _{L} is maximized.
B. AP _{L} is maximized.
C. TP _{L} is maximized.
D. MP _{L} = 0.
E. Both C and D are correct.
5.25 Consider the production function Q = f(K, L), where K is capital and L is labor. An isoquant:
A. Summarizes all the combinations of K and L necessary to produce a given level of output.
B. Summarizes all the combinations of K and L that can be efﬁciently produced with a given production technology.
C. Summarizes all the combinations of two outputs that can be produced with a given combination of K and L.
D.
Illustrates the leastcost combination K and L necessary to produced a given level of output.
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Production
5.26 Consider the production function Q = f(K, L), where K is capital and L is labor. The slope of an isoquant is:
I. The capitallabor ratio.
II. The negative of the ratio of marginal products of the inputs.
III. The rate at which one input can be substituted for another input.
Which of the following is correct?
A. I only.
B. II only.
C. III only.
D. I and II only.
E. II and III only.
5.27 Consider the production function Q = f(K, L), where K is capital and L is labor. A convex isoquant indicates that:
A. K and L are perfectly substitutable.
B. K and L must be used in ﬁxed proportions.
C. K and L are imperfectly substitutable.
D. As more of K is used, increasingly smaller amounts of L must be substituted for it in order to produce a given level of output.
5.28 Consider the production function Q = f(K, L), where K is capital and L is labor. The marginal rate of technical substitution may be deﬁned as:
I. 
The rate at which K and L may be substituted for each other while total output remains constant. 
II. 
Equal to the slope of the isoquant. 
III. 
The rate at which all combinations of K and L equal total cost. 
Which of the following is correct?
A. I only.
B. II only.
C. I and II only.
D. II and III only.
5.29 Consider the production function Q = f(K, L), where K is capital and L is labor. An “Lshaped” isoquant indicates that:
A. K and L are perfect substitutes for one another.
B. K and L must be used in ﬁxed proportions.
C. K and L are imperfect substitutes for one another.
D. None of the above statements are true.
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Multiple Choice Questions
71
5.30 Consider the production function Q = f(K, L), where K is capital and L is labor. A linear isoquant indicates that:
A. K and L are perfect substitutes for one another.
B. K and L must be used in ﬁxed proportions.
C. K and L are imperfect substitutes for one another.
D. None of the above statements are true.
5.31 Suppose that the ﬁrm’s production function is Q = 2L ^{0}^{.}^{2}^{5} K ^{0}^{.}^{5} , where K is capital and L is labor. With K on the vertical axis and L on the horizontal axis, the marginal rate of technical substitution is:
A. 2K/L.
B. K/L.
C. K/2L.
D. L/K.
5.32 The output elasticity of capital is:
A. ∂AP _{K} /K.
B. MP _{K} /AP _{K} .
C. ∂MP _{K} /K.
D. K/L.
5.33 Consider the CobbDouglas production function Q = 33K ^{0}^{.}^{3}^{3} L ^{0}^{.}^{6}^{6} , where K is capital and L is labor. This production function exhibits:
A. Increasing returns to scale.
B. Constant returns to scale.
C. Decreasing returns to scale.
D. Zero returns to scale.
E. Cannot be determined from the information provided.
5.34 The production function is Q = KL ^{}^{1} exhibits:
A. Increasing returns to scale.
B. Decreasing returns to scale.
C. Constant returns to scale.
D. Zero returns to scale.
E. None of the above.
5.35 Consider the CobbDouglas production function Q = 47K ^{0}^{.}^{4}^{5} L ^{0}^{.}^{5}^{5} ,
where K is capital and L is labor. The coefﬁcient of output elasticity is:
A. 0.45.
B. 0.55.
C. 1.
D. Cannot be determined from the information provided.
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SHORTER PROBLEMS
Production
5.1 ﬁrm’s production function is: A 

Q 
= 250K ^{0}^{.}^{7} L ^{0}^{.}^{3} 
Determine the marginal product of capital and the marginal product
of labor when K = 50 and L = 150.
5.2 Suppose that a ﬁrm’s production function is
_{Q} _{=} _{7}_{K} 0.5 _{L} 0.5
where Q is units of output, K is machine hours, and L is labor hours. Suppose that the amount of K available to the ﬁrm is ﬁxed at 144 machine hours.
A. 
What is the ﬁrm’s total product of labor equation? 
B. 
What is the ﬁrm’s marginal product of labor equation? 
C. 
What is the ﬁrm’s average product of labor equation? 
5.3 ﬁrm’s production function is: A 

Q 
= 250K ^{0}^{.}^{7} L ^{0}^{.}^{3} 
Verify that AP _{L} = MP _{L} when AP _{L} is maximized.
5.4 ﬁrm’s production function is: A 

Q 
= 200KL  10KL ^{2} 
Verify that AP _{L} = MP _{L} when AP _{L} is maximized.
5.5 ﬁrm’s production function is: A 

Q 
= 250K ^{0}^{.}^{7} L ^{0}^{.}^{3} 
Verify that this expression exhibits the law of diminishing marginal product with respect to variable labor input.
5.6 ﬁrm’s production function is: A 

Q 
= 250K ^{0}^{.}^{7} L ^{0}^{.}^{3} 
Suppose that Q = 1,000.
A. What is the equation of the corresponding isoquant in terms of L?
B. Demonstrate that this isoquant is convex with respect to the origin.
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Longer Problems
LONGER PROBLEMS
73
5.1 Suppose that the average product of labor is given by the equation
AP _{L} = 100 + 500L  5L ^{2}
A. What is the equation for the total product of labor (TP _{L} )?
B. What is the equation for the marginal product of labor (MP _{L} )?
C. At what level of labor usage is AP _{L} = MP _{L} ?
5.2 The research department of Merriweather International has estimated the following production function
_{Q} _{=} _{5}_{0}_{K} 0.5 _{L} 0.4 _{F} 0.4
where Q represents of units of output, K represents units of capital, L represents labor hours, and F represents thousands of square feet
of factory ﬂoor space.
A. Does this production function exhibit increasing, decreasing or constant returns to scale?
B. Estimate the coefﬁcient of output elasticity.
C. Determine the marginal product equations.
D. Suppose that K = 625, L = 20, and F = 50. Estimate total output.
5.3 Consider the following production functions:
1) 
Q = 200K ^{0}^{.}^{5} L ^{0}^{.}^{5} 
2) 
Q = 2K + 2L + 5KL 
3) 
Q = 50 + 5K + 5L 
4) 
Q = 3K/3L 
where Q represents of units of output, K represents units of capital, and L represents labor hours.
A. Suppose that K = L = 1. Calculate total output for each production function.
B. Suppose that K = L = 2. Calculate total output for each production function.
C. Based upon your answers to parts A. and B., do these production functions exhibit increasing, decreasing, or constant returns to scale?
5.4 Consider the following production function:
Q = 300KL + 18L ^{2} + 3K ^{2}  0.5L ^{3}  0.25K ^{3}
where Q is units of output per month, L is the number of workers, and K is units of capital. Assume that L = 20 and K = 10.
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74
A. Calculate total output per month.
B. Calculate MP _{L} and MP _{K} .
C. Calculate AP _{L} and AP _{K} .
Production
5.5 
Consider the following production function: 

Q = 225L + 100K  7.5L ^{2}  5K ^{2} + KL 

where Q represents units of output per month, L is the number of workers, and K is units of capital. 

A. 
How much K and L will maximize Q? 

B. 
What is the maximum output per month? 

ANSWERS TO MULTIPLE CHOICE QUESTIONS 

5.1 
D. 
5.19 D. 
5.2 
A. 
5.20 C. 
5.3 
B. 
5.21 C. 
5.4 
C. 
5.22 C. 
5.5 
C. 
5.23 D. 
5.6 
E. 
5.24 E. 
5.7 
A. 
5.25 A. 
5.8 
D. 
5.26 E. 
5.9 
B. 
5.27 C. 
5.10 
E. 
5.28 C. 
5.11 
B. 
5.29 B. 
5.12 
C. 
5.30 A. 
5.13 
D. 
5.31 C. 
5.14 
C. 
5.32 B. 
5.15 
C. 
5.33 C. 
5.16 
B. 
5.34 B. 
5.17 
C. 
5.35 C. 
5.18 
A. 

SOLUTIONS TO SHORTER PROBLEMS 

5.1 
MP _{K} = ∂Q _{K} /∂K = 0.7(250)K ^{}^{0}^{.}^{3} L ^{0}^{.}^{3} = 175K ^{}^{0}^{.}^{3} L ^{0}^{.}^{3} = 175(L/K) ^{0}^{.}^{3} = 243.32 MP _{L} = ∂Q _{L} /∂L = 0.3(250)K ^{0}^{.}^{7} L ^{0}^{.}^{3}^{}^{1} = 75K ^{0}^{.}^{7} L ^{}^{0}^{.}^{7} = 75(K/L) ^{0}^{.}^{7} = 34.76 

5.2 
A. TP _{L} = 7(144) ^{0}^{.}^{5} L ^{0}^{.}^{5} = 84L ^{0}^{.}^{5} 
B. MP _{L} = dTP _{L} /dL = 0.5(7)(144) ^{0}^{.}^{5} L ^{}^{0}^{.}^{5} = 42L ^{}^{0}^{.}^{5}
C. AP _{L} = TP _{L} /L = 84L ^{0}^{.}^{5} /L = 84L ^{}^{0}^{.}^{5}
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Solutions to Shorter Problems
75
5.3 MP _{L} = 0.3(250K ^{0}^{.}^{7} L ^{}^{0}^{.}^{7} ) AP _{L} = Q/L = (250K ^{0}^{.}^{7} L ^{0}^{.}^{3} )/L ∂AP _{L} /∂L = [0.3(250K ^{0}^{.}^{7} L ^{}^{0}^{.}^{7} )L  250K ^{0}^{.}^{7} L ^{0}^{.}^{3} ]/L ^{2} = 0, i.e., the ﬁrstorder condition for AP _{L} maximization. Since L > 0, this implies that 0.3(250K ^{0}^{.}^{7} L ^{}^{0}^{.}^{7} )L  250K ^{0}^{.}^{7} L ^{0}^{.}^{3} = 0 0.3(250K ^{0}^{.}^{5} L ^{}^{0}^{.}^{7} ) = 250K ^{0}^{.}^{7} L ^{0}^{.}^{3} /L MP _{L} = AP _{L}
5.4 MP _{L} = 200K  20KL AP _{L} = (200KL  10KL ^{2} )/L ∂AP _{L} /∂L = [(200K  20KL)L  (200KL  10KL ^{2} )]/L ^{2} = 0, i.e., the ﬁrstorder condition for AP _{L} maximization. L > 0 implies that (200K  20KL)L  (200KL  10KL ^{2} ) = 0 (200K  20KL)L = 200KL  10KL ^{2} 200K  20KL = (200KL  10KL ^{2} )/L MP _{L} = AP _{L}
5.5 MP _{L} = ∂Q _{L} /∂L = 0.3(250)K ^{0}^{.}^{7} L ^{}^{0}^{.}^{7} = 75K ^{0}^{.}^{7} L ^{}^{0}^{.}^{7} > 0 since L and K are positive. The second partial derivative of the production function is ∂MP _{K} /∂K = ∂ ^{2} Q _{K} /∂K ^{2} = 0.7(75)K ^{0}^{.}^{7} L ^{}^{1}^{.}^{7} < 0 which is clearly negative since L ^{}^{1}^{.}^{7} = 1/L ^{1}^{.}^{7} > 0.
5.6 1,000 = 250K ^{0}^{.}^{7} L ^{0}^{.}^{3} Solving this equation for K in terms of L yields K ^{0}^{.}^{7} = 1,000(250L ^{0}^{.}^{3} ) ^{}^{1} = 1,000(250 ^{}^{1} L ^{}^{0}^{.}^{3} ) = 4L ^{}^{0}^{.}^{3} A. 

_{(}_{K} 0.7 _{)} 1/0.7 _{=} _{(}_{4}_{L} 0.3 _{)} (1/0.7) _{K} _{=} _{4} 1/0.7 _{L} 0.3/0.7 

B. 
Taking the ﬁrst and second derivatives of this expression yields dK/dL = (0.3/0.7)(4 ^{1}^{/}^{0}^{.}^{7} L ^{}^{1}^{.}^{3}^{/}^{0}^{.}^{7} ) < 0 
_{S}_{i}_{n}_{c}_{e} _{L} 1.3/0.7 _{=} _{1}_{/}_{L} 1.3/0.7 _{>} _{0}
d ^{2} K/dL ^{2} = (1.3/0.7)(0.3/0.7)(4 ^{1}^{/}^{0}^{.}^{7} L ^{}^{2}^{.}^{3}^{/}^{0}^{.}^{7} ) = (0.39/0.7)(4 ^{1}^{/}^{0}^{.}^{7} L ^{}^{2}^{.}^{3}^{/}^{0}^{.}^{7} ) > 0
_{S}_{i}_{n}_{c}_{e} _{L} 2.3/0.7 _{=} _{1}_{/}_{L} 2.3/0.7 _{>} _{0}
Since the ﬁrst derivative is negative and the second derivative is positive then the isoquant is convex with respect to the origin.
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Production
SOLUTIONS TO LONGER PROBLEMS
5.1 TP _{L} = (AP _{L} )L = (100 + 500L  5L ^{2} )L = 100L + 500L ^{2}  5L ^{3}
A.
B.
C.
MP _{L} = dTP _{L} /dL = 100 + 1,000L  15L ^{2}
AP _{L} = MP _{L} 100 + 500L  5L ^{2} = 100 + 1,000L  15L ^{2} 10L ^{2} = 500L 10L = 500
L = 50
Alternatively,
dAP _{L} /dL = 500  10L = 0, i.e., the ﬁrstorder condition for AP _{L} maximization.
L = 50
d ^{2} AP _{L} /dL ^{2} = 10 < 0, i.e., the secondorder condition for AP _{L} maximization is satisﬁed.
5.2 Let l be some factor of proportionality.
A.
_{E}_{¢} _{=} _{5}_{0}_{(}_{l}_{K}_{)} 0.5 _{(}_{l}_{L}_{)} 0.4 _{(}_{l}_{F}_{)} 0.4 _{=} _{5}_{0}_{l} 0.5 _{K} 0.5 _{l} 0.4 _{L} 0.4 _{l} 0.4 _{F} 0.4
B.
C.
D.
_{=} _{l} 1.3 _{5}_{0}_{K} 0.5 _{L} 0.4 _{F} 0.4 _{=} _{l} 1.3 _{Q}
If all inputs are increased by the scalar l, enrollments will
increase by l ^{1}^{.}^{3} . Thus, this production function exhibits increasing returns to scale. Alternatively, the above production function exhibits increasing returns to scale because 0.5 + 0.4 + 0.4 = 1.3 > 0.
e _{Q} = e _{K} + e _{L} + e _{F} = 0.5 + 0.4 + 0.4 = 1.3
MP _{K} = 0.5(50)K ^{}^{0}^{.}^{5} L ^{0}^{.}^{4} F ^{0}^{.}^{4} = 25K ^{}^{0}^{.}^{5} L ^{0}^{.}^{4} F ^{0}^{.}^{4} _{M}_{P} L _{=} _{0}_{.}_{4}_{(}_{5}_{0}_{)}_{K} 0.5 _{L} 0.6 _{F} 0.4 _{=} _{2}_{0}_{K} 0.5 _{L} 0.6 _{F} 0.4 _{M}_{P} F _{=} _{0}_{.}_{4}_{(}_{5}_{0}_{)}_{K} 0.5 _{L} 0.3 _{F} 0.6 _{=} _{2}_{0}_{K} 0.5 _{L} 0.4 _{F} 0.6
Q
= 50K ^{0}^{.}^{5} L ^{0}^{.}^{4} F ^{0}^{.}^{4} = 50(625) ^{0}^{.}^{5} (20) ^{0}^{.}^{4} (50) ^{0}^{.}^{4} = 50(25)(3.31)(4.78)
= 19,777.25
5.3 1) Q = 200(1) ^{0}^{.}^{5} (1) ^{0}^{.}^{5} = 200
A.
B.
2) Q = 2(1) + 2(1) + 5(1)(1) = 9
3)
4) Q = 3(1)/3(1) = 1
1) Q = 200(2) ^{0}^{.}^{5} (2) ^{0}^{.}^{5} = 400
2) Q = 2(2) + 2(2) + 5(2)(2) = 28
3)
4) Q = 3(2)/3(2) = 1
Q = 50 + 5(1) + 5(1) = 60
Q = 50 + 5(2) + 5(2) = 70
WSG5 7/7/03 4:35 PM Page 77
Solutions to Longer Problems
77
C. 1) Since output doubled as K and L were doubled, then this production function exhibits constant returns to scale. Alternatively, for CobbDouglas production functions, returns to scale may be determined by adding the values of the exponents. Since 0.5 + 0.5 = 1, then this production function exhibits constant returns to scale. 2) Since output more than doubled as K and L were doubled, then this production function exhibits increasing returns to scale. 3) Since output less than doubled as K and L were doubled, then this production function exhibits decreasing returns to scale. 4) Since output less than doubled (remained unchanged) as K and L were doubled, then this production function exhibits decreasing returns to scale.
5.4 A. Q = 300(10)(20) + 18(20) ^{2} + 3(10) ^{2}  0.5(20) ^{3}  0.25(10) ^{3} = 60,000 + 7,200 + 300  4,000  250 = 63,250
B. MP _{L} = ∂Q/∂L = 300K + 36L  3L ^{2}
= 300(10) + 36(20)  3(20) ^{2}
= 3,000 + 720  1,200 = 2,520
MP _{K} = ∂Q/∂K = 300L + 6K  0.75K ^{2}
= 300(20) + 6(10)  0.75(10) ^{2}
= 6,000 + 600  75 = 6,525
C. AP _{L} = Q/L = (300KL + 18L ^{2} + 3K ^{2}  0.5L ^{3}  0.25K ^{3} )/L
= 300K + 18L + 3K ^{2} /L  0.5L ^{2}  0.25K ^{3} /L
= 300(10) + 18(20) + 3(10) ^{2} /20  0.5(20) ^{2} 0.25(10) ^{3} /10
= 3,000 + 360 + 15  200  25 = 3,150
AP _{K} = Q/K = (300KL + 18L ^{2} + 3K ^{2}  0.5L ^{3}  0.25K ^{3} )/K
= 300L + 18L ^{2} /K + 3K  0.5L ^{3} /K  0.25K ^{2}
= 300(20) + 18(20) ^{2} /10 + 3(10)  0.5(20) ^{3} /10  0.25(10) ^{2}
= 6,000 + 720 + 30  400  25 = 6,325
WSG5 7/7/03 4:35 PM Page 78
78
5.5
Production
A. ∂Q/∂L = 225  15L + K = 0, i.e., the ﬁrstorder condition for Q maximization. ∂Q/∂K = 100  10K + L = 0, i.e., the ﬁrstorder condition for Q maximization. Solving the ﬁrstorder conditions simultaneously yields L* = 15.77 K* = 11.77
B. Q* = 225(15.77) + 100(11.74)  7.5(15.77) ^{2}  5(11.74) ^{2} + (11.74)(15.77)
= 3,548.66 + 1,174.50  1,865.63  670.16 + 185.24
= 2,372.61
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