Exam 5: Production Theory and Estimation

The table below presents estimates of the maximum levels of output possible with various combinations of two inputs. Assume that a unit of output sells for $2 and that the firm currently employs two units of capital (K = 2). (i) What is the marginal product of labor when L = 4? (ii) What is the average product of labor when L = 4? (iii) What is the marginal revenue product of labor when L = 4? What is the output elasticity of labor when L = 4? (iv) If the wage rate of labor is $10, how many units of labor should the firm hire and how many units of output should it produce?

CAD is an acronym that stands for capital-assisted development.

The product cycle model asserts that innovating firms tend to achieve long-term domination of markets.

Suppose that three isoquants that represent 10, 20, and 30 units of output are plotted on a graph and a straight line is drawn from the origin through the isoquants. If the portion of the line between the isoquants that represent 10 and 20 units of output is longer than the portion of the line between the isoquants that represent 20 and 30 units of output, then the firm represented by these isoquants

A firm currently employs 45 production workers and 6 supervisors. The marginal product of the last production worker employed is 50 units of output per hour and production workers are paid $10 per hour. The marginal product of the last supervisor employed is 150 units of output per hour and supervisors are paid $30 per hour. Every employee works 40 hours per week. (i) What is the firm's total labor cost per week? (ii) Assume that hours of labor by supervisors (Ls) is plotted on the vertical axis and hours of labor by production workers (Lp) is plotted on the horizontal axis. What is the equation for the firm's isocost line? What are the two intercepts of the isocost line? (iii) Assume that the firm's isoquants are smooth curves and that labor hours can be varied continuously. Is the firm producing the maximum level of output given its current level of cost? If it is, explain how you can tell. If it isn't, explain what it should do to increase output.

If the marginal rate of technical substitution is the same at all points on an isoquant, then the two inputs are perfect substitutes.

Ridge lines drawn on an isoquant map separate Stage II from Stages I and III of production.

American firms generally stress product innovation while Japanese firms stress process innovation.

CAD-CAM allows firms to develop products more rapidly and at a lower cost.

A country will import goods in which it has a comparative advantage and export goods in which it has a comparative disadvantage.

Firms will only operate at points on an isoquant map that are between the ridge lines.

A firm currently employs 25 production workers and 4 supervisors. The marginal product of the last production worker employed is 50 units of output per hour and production workers are paid $10 per hour. The marginal product of the last supervisor employed is 160 units of output per hour and supervisors are paid $40 per hour. Every employee works 40 hours per week. (i) What is the firm's total labor cost per week? (ii) Assume that hours of labor by supervisors (Ls) is plotted on the vertical axis and hours of labor by production workers (Lp) is plotted on the horizontal axis. What is the equation for the firm's isocost line? What are the two intercepts of the isocost line? (iii) Assume that the firm's isoquants are smooth curves and that labor hours can be varied continuously. Is the firm producing the maximum level of output given its current level of cost? If it is, explain how you can tell. If it isn't, explain what it should do to increase output.

If the price of an input increases, then the firm will use more of it.

Scale is a short-run concept.

The slope of the short-run production function is equal to the average product of the variable input.

Most innovations are based on new technologies and ideas.

The use of robots on automobile assembly lines is an example of product innovation.

The marginal resource cost of an input is equal to the change in total cost that results from hiring an additional unit of a variable input.

All expansion paths are straight lines through the origin.

The point of tangency between a convex isoquant and an isocost line represents an optimal combination of inputs.