Exam 5: Production Theory and Estimation

Most firms operate at a level of output that results in nearly constant returns to scale.

Innovation tends to be stimulated by an environment where firms are protected from competitive forces.

Production refers to all activities involved in the production of goods and services.

If a firm is maximizing profit, then it must be employing a combination of inputs that is on its expansion path.

Most innovations involve revolutionary departures from previous practices and products.

A country that has a relative abundance of cheap labor will tend to have a comparative advantage in the production of goods that are produced using a lot of labor.

If a firm is experiencing increasing returns to scale, then a doubling of output will require more than a doubling of all inputs.

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 $5 and that the firm currently employs one unit of capital (K = 1). (i) What is the marginal product of labor when L = 2? (ii) What is the average product of labor when L = 2? (iii) What is the marginal revenue product of labor when L = 2? What is the output elasticity of labor when L = 2? (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?

Decreasing returns to scale arise because of increased specialization and division of labor at higher levels of output.

The firm plans in the short run and operates in the long run.

A firm currently employs 40 production workers and 5 supervisors. The marginal product of the last production worker employed is 36 units of output per hour and production workers are paid $8 per hour. The marginal product of the last supervisor employed is 120 units of output per hour and supervisors are paid $20 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.

A firm wants to minimize the cost of producing 2,800 units of output per week. It has hired a production engineer to identify alternative production technologies that will accomplish this goal. The production technologies use the different combinations of capital (K) and labor (L) that are listed below. Assume that the rental price of capital is $5 and the wage rate of labor is $4. Determine the minimum cost of producing 2,800 units of output and then show how the combination of inputs that yield the minimum cost can be determined using the marginal approach.

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 $10 and that the firm currently employs four units of capital (K = 4). (i) What is the marginal product of labor when L = 5? (ii) What is the average product of labor when L = 5? (iii) What is the marginal revenue product of labor when L = 5? What is the output elasticity of labor when L = 5? (iv) If the wage rate of labor is $80, how many units of labor should the firm hire and how many units of output should it produce?

CAM is an acronym that stands for computer-aided manufacturing.

The closer an isoquant is to a straight line, the closer the inputs are to being perfect complements.

If a firm is employing a combination of inputs that is on its expansion path, then it must be maximizing profits.

One disadvantage of modern computerized production methods is that they tend to reduce the optimal lot size, thus reducing total profits.

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 $3 and that the firm currently employs three units of capital (K = 3). (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 $12, how many units of labor should the firm hire and how many units of output should it produce?

Every point on an expansion path represents a combination of inputs that minimizes the cost of producing a given level of output.

The absolute value of the slope of the isocost line is equal to the ratio of input prices.