Exam 7: The Production Process: the Behavior of Profit-Maximizing Firms

Assume that for whatever reason there is a manufacturing firm exhibits a constant marginal product of labor over a certain range of production. Armed with only this information what would you be able to say about the average product and total product of labor curves of this firm.

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Question 1

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The marginal product curve and the average product curve would be one and the same and would have a horizontal shape of the relevant production range. The total product function would be an upward-sloping linear function.

On the figure below, indicate the level of labor where diminishing returns set in.

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Question 2

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Diminishing returns set in at the level of labor where the marginal product of labor begins to decline. Since the marginal product of labor is the slope of the total product curve, diminishing returns can be seen once the slope of the total product curve begins to decline.

What three pieces of information do firms need to know to make production decisions?

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Question 3

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(1.) The market price of the output. (2.) The techniques of production which are available. (3.) The prices of inputs.

Rhonda's Rug Company can produce 50 rugs using the following five combinations of labor and capital: If the price of capital is $2 per unit and the price of labor is $1 per unit, calculate the total cost of producing 50 rugs under each technology. Which is the cost-minimizing technology?

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Question 4

Martha owns a factory which can produce 150 coffee mugs using the following five combinations of labor and capital: If the price of capital is $5 per unit and the price of labor is $3 per unit, calculate the total cost of producing 150 coffee mugs under each technology. Which technology would a profit-maximizing firm use?

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Question 5

If the marginal product of labor is equal to 5 and the marginal product of capital is 2, what is the marginal technical rate of substitution?

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Question 6

Label each of the three graphs below X, Y and Z as either the marginal product, average product or total product of labor and explain the relationship between each of them.

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Question 7

Evaluate the following statement. "I used my own money, my own land and my own equipment to start my business. Therefore I don't have any costs associated with running my business".

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Question 8

If marginal product is a constant what can we conclude about the shape of the average product function and why?

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Question 9

Explain the law of diminishing returns.

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Question 10

Evaluate the following statement. "If marginal product is falling it will bring down the average product."

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Question 11

The data below shows the relationship between total output and the amount of labor hired at Papa's Pizza Shop:

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Question 12

Assume that a very unusual production process involves increasing marginal productivity that appears to have no end. What would the total productivity function look like? Comment on the likelihood of such a function in the real world.

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Question 13

What is production technology?

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Question 14

Comment on the following statement: "When average product and marginal product are equal, marginal product is at its maximum."

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Question 15

How is the average product of labor calculated?

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Question 16

There is a famous economics saying that argues "if diminishing marginal productivity never set in then the world could be fed from a flower pot." Explain what this means economically.

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Question 17

Explain what is meant by marginal product.

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Question 18

What role do business firms play in output markets and in factor markets?

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Question 19

Comment on the following statement: "Diminishing returns occur when total output falls as additional units of labor are combined with fixed inputs in the production process."

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Question 20

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Assume that for whatever reason there is a manufacturing firm exhibits a constant marginal product of labor over a certain range of production. Armed with only this information what would you be able to say about the average product and total product of labor curves of this firm.

On the figure below, indicate the level of labor where diminishing returns set in.

What three pieces of information do firms need to know to make production decisions?

Rhonda's Rug Company can produce 50 rugs using the following five combinations of labor and capital: If the price of capital is $2 per unit and the price of labor is $1 per unit, calculate the total cost of producing 50 rugs under each technology. Which is the cost-minimizing technology?

If the marginal product of labor is equal to 5 and the marginal product of capital is 2, what is the marginal technical rate of substitution?

Label each of the three graphs below X, Y and Z as either the marginal product, average product or total product of labor and explain the relationship between each of them.

Evaluate the following statement. "I used my own money, my own land and my own equipment to start my business. Therefore I don't have any costs associated with running my business".

If marginal product is a constant what can we conclude about the shape of the average product function and why?

Explain the law of diminishing returns.

Evaluate the following statement. "If marginal product is falling it will bring down the average product."

The data below shows the relationship between total output and the amount of labor hired at Papa's Pizza Shop:

Assume that a very unusual production process involves increasing marginal productivity that appears to have no end. What would the total productivity function look like? Comment on the likelihood of such a function in the real world.

What is production technology?

Comment on the following statement: "When average product and marginal product are equal, marginal product is at its maximum."

How is the average product of labor calculated?

There is a famous economics saying that argues "if diminishing marginal productivity never set in then the world could be fed from a flower pot." Explain what this means economically.

Explain what is meant by marginal product.

What role do business firms play in output markets and in factor markets?

Comment on the following statement: "Diminishing returns occur when total output falls as additional units of labor are combined with fixed inputs in the production process."

The Scope and Method of Economics

The Economic Problem: Scarcity and Choice

Demand, Supply, and Market Equilibrium

Demand and Supply Applications

Elasticity

Household Behavior and Consumer Choice

Short-Run Costs and Output Decisions

Long-Run Costs and Output Decisions

Input Demand: the Labor and Land Markets

Input Demand: the Capital Market and the Investment Decision

General Equilibrium and the Efficiency of Perfect Competition

Monopoly and Antitrust Policy

Oligopoly

Monopolistic Competition

Externalities, Public Goods, and Social Choice

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